Beliefs - and fundamentals-driven job creation

Abstract

This paper studies whether beliefs about future labour productivity independent of fundamentals at any horizon are important drivers of job creation. It develops a model with search frictions in the labour market that accounts for imperfectly observed permanent labour productivity changes. The estimation of the model shows that beliefs are important drivers of job creation in economies with larger search frictions. Beliefs explain 2%, 35%, and 55% of employment fluctuations for the US, the UK and France respectively. Furthermore, exogenous belief changes exert a more powerful influence on job creation during times when unemployment is low.

Keywords: Labour productivity, information frictions, fundamentals and beliefs, equilibrium unemployment growth model, search and matching, business cycles

JEL Classification: E24, E32, E37