Revisiting the Hypothesis of High Discounts and High Unemployment

Abstract

We revisit the hypothesis that labor market ‡uctuations are driven by shocks to the discount rate. Using a model in which the UE and the EU rates are endogenous, we show that an increase in the discount rate leads to a decline in both the UE and the EU rates. In the data, though, the UE and EU rates move against each other at business cycle frequency. Using a lifecycle model with human capital accumulation on the job, we show that an increase in the discount rate does indeed lead to a decline in the aggregate UE rate and to an increase in the aggregate EU rate. However, the decline in the UE rate is larger for younger workers than for older workers and the EU rate increases only for younger workers. In the data, ‡uctuations in the UE and EU rates at the business cycle frequency are nearly identical across age groups.

On the Heterogeneous Impacts of the COVID-19 Lockdown on US Unemployment

“…28 In Martellini et al (2020), a discount rate decrease-by reducing the expected profits-cuts incentives to open vacancies, but also the job-to-job mobilities and thus job separations, given that agents can search on-the-job. Hence, the impact of discount rate changes on unemployment is ambiguous.…”

Invariance of Unemployment and Vacancy Dynamics with Respect to Diminishing Returns to Labor at the Firm Level

“…Chodorow-Reich and Karabarbounis (2016) measure the opportunity cost of employment and find that it is procyclical, pointing out that this dampens unemployment fluctuations in various models. Hall (2017) and Martellini et al (2020) explore the hypothesis that discount factor fluctuations are an important driving force.…”