Whither Job Destruction? Unemployment, Job Flows and Hours in a New Keynesian Model

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: Labour markets play a key role in business cycle analysis. Although a focal point of research on unemployment over the past decade, endogenous job destruction has recently fallen into disfavour, since its introduction leads to a positively sloped Beveridge curve. We show that introducing variation in hours per worker - a second margin for labour input adjustment in combination with endogenous job destruction generates a negatively sloped Beveridge curve, a data consistent correlation structure for job flows and captures many aspects of the cyclical behaviour of hours per worker. This improved performance is robust to wage rigidity (which raises the variability of unemployment and labour market tightness) and a wide range of empirically plausible labour supply elasticities - but not completely inelastic labour supply implicit in much of the literature on labour market search.

Pages: 46
Date: 2006-10
New Economics Papers: this item is included in nep-lab and nep-mac
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