Hiring Freeze and Bankruptcy in Unemployment Dynamics

32 Pages Posted: 8 Sep 2006

See all articles by Pietro Garibaldi

Pietro Garibaldi

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2006


This paper proposes a matching model that distinguishes between job creation by existing firms and job creation by firm entrants. The paper argues that vacancy posting and job destruction on the extensive margin, i.e. from firms that enter and exit the labour market, represents a viable mechanism for understanding the cyclical properties of vacancies and unemployment. The model features both hiring freeze and bankruptcies, where the former represents a sudden shut down of vacancy posting at the firm level with labour downsizing governed by natural turnover. A bankrupt firm, conversely, shut down its vacancies and lay offs its stock of workers. Recent research in macroeconomics has shown that a calibration of the Mortensen and Pissarides matching model account for 10 percent of the cyclical variability of the vacancy unemployment ratio displayed by U.S. data. A calibration of the model that explicitly considers hiring freeze and bankruptcy can account for 20 to 35 percent of the variability displayed by the data.

Keywords: unemployment dynamics, matching models

JEL Classification: J30

Suggested Citation

Garibaldi, Pietro, Hiring Freeze and Bankruptcy in Unemployment Dynamics (August 2006). IZA Discussion Paper No. 2263, Available at SSRN: https://ssrn.com/abstract=928809 or http://dx.doi.org/10.2139/ssrn.928809

Pietro Garibaldi (Contact Author)

Bocconi University - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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IZA Institute of Labor Economics

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