Working Paper: NBER ID: w21575
Authors: Mete Kilic; Jessica A. Wachter
Abstract: What is the driving force behind the cyclical behavior of unemployment and vacancies? What is the relation between job-creation incentives of firms and stock market valuations? We answer these questions in a model with time-varying risk, modeled as a small and variable probability of an economic disaster. A high probability implies greater risk and lower future growth, lowering the incentives of firms to invest in hiring. During periods of high risk, stock market valuations are low and unemployment rises. The model thus explains volatility in equity and labor markets, and the relation between the two.
Keywords: unemployment; stock market; labor market volatility; disaster risk
JEL Codes: E24; E32; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high probability of economic disaster (H12) | lower future growth (O49) |
| lower future growth (O49) | diminished firms' incentives to invest in hiring (J23) |
| diminished firms' incentives to invest in hiring (J23) | higher unemployment (J64) |
| diminished firms' incentives to invest in hiring (J23) | lower stock market valuations (G19) |
| high probability of economic disaster (H12) | higher unemployment (J64) |
| high probability of economic disaster (H12) | lower stock market valuations (G19) |
| higher unemployment (J64) | lower stock market valuations (G19) |