A Forest Fire Theory of the Duration of a Boom and the Size of a Subsequent Bust

Matthew O. Jackson

Stanford University - Department of Economics; Santa Fe Institute; Canadian Institute for Advanced Research (CIFAR)

Pietro Tebaldi

University of Chicago - Department of Economics

November 1, 2015

We show that a class of models of matching from firms' perspectives (that nest most standard search models) necessarily exhibit specific dynamic patterns of employment. Despite the prevalent use of models within this class, these patterns have not been noted before. Focusing on labor search as a leading example, in presence of search frictions, firms prefer to hire low productivity workers in high-demand states to take advantage of current profit opportunities. This implies that bad matches accumulate during expansions, leading to drops in employment, and other inputs, that are positively related to the length of the expansion when a negative shock eventually hits: the longer since the last contraction, the larger the absolute and percentage drop in the employment of labor and capital inputs.

We also show that this phenomenon is present in observed dynamics, using US micro-data. We find that five additional years of expansion lead to an additional drop of thirty percent in employment growth at the onset of a downturn.

Number of Pages in PDF File: 52

Keywords: recessions, employment, unemployment, matching, search, business cycles, macro-dynamics

JEL Classification: E24, E32, D92, D21, D22

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Date posted: July 8, 2013 ; Last revised: November 6, 2015

Suggested Citation

Jackson, Matthew O. and Tebaldi, Pietro, A Forest Fire Theory of the Duration of a Boom and the Size of a Subsequent Bust (November 1, 2015). Available at SSRN: https://ssrn.com/abstract=2263501 or http://dx.doi.org/10.2139/ssrn.2263501

Contact Information

Matthew O. Jackson (Contact Author)
Stanford University - Department of Economics ( email )
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
1-650-723-3544 (Phone)
HOME PAGE: http://www.stanford.edu/~jacksonm
Santa Fe Institute
1399 Hyde Park Road
Santa Fe, NM 87501
United States
Canadian Institute for Advanced Research (CIFAR) ( email )
180 Dundas Street West, Suite 1400
Toronto, Ontario
Pietro Tebaldi
University of Chicago - Department of Economics ( email )
1126 E. 59th St
Chicago, IL 60637
United States
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