The Scarring Effect of Asymmetric Business Cycles

Posted: 13 May 2018

See all articles by Domenico Ferraro

Domenico Ferraro

Arizona State University (ASU) - Economics Department

Giuseppe Fiori

Board of Governors of the Federal Reserve System

Date Written: February 12, 2018

Abstract

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

Suggested Citation

Ferraro, Domenico and Fiori, Giuseppe, The Scarring Effect of Asymmetric Business Cycles (February 12, 2018). Available at SSRN: https://ssrn.com/abstract=3171730 or http://dx.doi.org/10.2139/ssrn.3171730

Domenico Ferraro (Contact Author)

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

Giuseppe Fiori

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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