The effects of productivity and benefits on unemployment: Breaking the link

A.J.G. Brown, B. Kohlbrecher, C. Merkl*, D.J. Snower

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

1 Citation (Web of Science)

Abstract

In the standard macroeconomic search and matching model of the labor market, there is a tight link between the quantitative effects of (i) aggregate productivity shocks on unemployment and (ii) unemployment benefits on unemployment. This tight link is at odds with the empirical literature. We show that a two-sided model of labor market search where the household and firm decisions are decomposed into job offers, job acceptances, firing, and quits can break this link. In such a model, unemployment benefits affect households' behavior directly, without having to run via the bargained wage. A calibration of the model based on U.S. JOLTS data generates both a solid amplification of productivity shocks and a moderate effect of benefits on unemployment. Our analysis shows the importance of investigating the effects of policies on the households' work incentives and the firms' employment incentives within the search process.

Original languageEnglish
Pages (from-to)967-980
Number of pages14
JournalEconomic Modelling
Volume94
DOIs
Publication statusPublished - Jan 2021

JEL classifications

  • o40 - Economic Growth and Aggregate Productivity: General
  • e24 - "Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital"

Keywords

  • Aggregate shocks
  • Macro models of the labor market
  • Search and matching
  • Unemployment benefits
  • JOB SEARCH
  • WAGE
  • CYCLICAL BEHAVIOR
  • IMPACT
  • INSURANCE
  • EQUILIBRIUM UNEMPLOYMENT
  • DURATION

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