Working Paper: CEPR ID: DP4765
Authors: Wouter den Haan; Christian Haefke; Garey Ramey
Abstract: According to Ljungqvist and Sargent (1998), high European unemployment since the 1980s can be explained by a rise in economic turbulence, leading to greater numbers of unemployed workers with obsolete skills. These workers refuse new jobs due to high unemployment benefits. In this Paper we reassess the turbulence unemployment relationship using a matching model with endogenous job destruction. In our model, higher turbulence reduces the incentives of employed workers to leave their jobs. If turbulence has only a tiny effect on the skills of workers experiencing endogenous separation, then the results of Ljungqvist and Sargent (1998, 2004) are reversed, and higher turbulence leads to a reduction in unemployment. Thus, changes in turbulence cannot provide an explanation for European unemployment that reconciles the incentives of both unemployed and employed workers.
Keywords: European unemployment; puzzle; skill loss
JEL Codes: E24; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher economic turbulence (E32) | Reduced incentives of employed workers to leave their jobs (J63) |
| Higher economic turbulence (E32) | Decrease in unemployment (J68) |
| Turbulence has a tiny effect on skills of separated workers (F66) | Reversal of expected positive relationship between turbulence and unemployment (E32) |
| Small probability of skill loss after endogenous separation (J24) | Elimination of positive relationship between turbulence and unemployment (F66) |