The Scarring Effect of Asymmetric Business Cycles
Posted: 13 May 2018
Date Written: February 12, 2018
Business cycle fluctuations in the U.S. employment-to-population ratio are asymmetric: deviations below trend (troughs) are larger than deviations above trend (peaks). This asymmetry has a "scarring effect," which reduces the average level of the employment-to-population ratio around which the economy fluctuates. To quantify such a scar, we formulate an equilibrium business cycle model featuring frictional unemployment and a labor force participation choice that produces the observed labor market asymmetry in the face of symmetric business cycle shocks. We quantify that the employment-to-population ratio would be 0.3 percentage points higher in the absence of cyclical fluctuations. Further, by dampening business cycles, counter-cyclical stabilization policy reduces the job loss by 70%.
Keywords: Asymmetric Business Cycles; Employment; Unemployment; Labor Force Participation; Income Taxes; Counter-Cyclical Tax Policy
JEL Classification: E24; E32; E62; J11; J63; J64
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