The Unemployment-Risk Channel in Business-Cycle Fluctuations

66 Pages Posted: 9 Nov 2021

See all articles by Tobias Broer

Tobias Broer

Paris School of Economics (PSE)

Jeppe Druedahl

University of Copenhagen - Department of Economics

Karl Harmenberg

BI Norwegian Business School

Erik Öberg

Uppsala University

Date Written: October 2021

Abstract

We quantify the unemployment-risk channel in business-cycle fluctuations, whereby an initial contractionary shock is amplified through workers reducing their demand in fear of unemployment. We document two stylized facts on how unemployment and unemployment risk respond to identified demand and supply shocks in US data. First, separation and job-finding rates play similar important roles in accounting for the overall unemployment response. Second, separations are more important early on, while job-finding rates respond with a lag. We show how a tractable heterogeneous-agent new-Keynesian model with a frictional labor market matches both facts once we include endogenous separations and sluggish vacancy creation. Relative to a model with exogenous separations and free entry, our framework attributes almost twice as large a share of output fluctuations to the inefficient unemployment-risk channel, and thus gives a larger role to stabilization policy.

Keywords: business cycles, HANK, Search and Matching, unemployment risk

JEL Classification: E21, E24, E32

Suggested Citation

Broer, Tobias and Druedahl, Jeppe and Harmenberg, Karl and Öberg, Erik, The Unemployment-Risk Channel in Business-Cycle Fluctuations (October 2021). CEPR Discussion Paper No. DP16639, Available at SSRN: https://ssrn.com/abstract=3960221

Tobias Broer (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Jeppe Druedahl

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Karl Harmenberg

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Erik Öberg

Uppsala University ( email )

Box 513
Uppsala, 751 20
Sweden

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