The asymmetric cyclical behavior of the U.S. labor market

Abstract

Cyclical fluctuations in the U.S. labor market and output exhibit a significant asymmetry. In this paper, I develop a search-and-matching model with endogenous job destruction and permanently heterogeneous workers (in skill/productivity) that accounts for this asymmetry while also generating (i) realistic volatility in unemployment and job-finding rates and (ii) preserving a downward-sloping Beveridge curve. The model delivers stark predictions for the time series of skill-specific unemployment rates that hold in CPS micro data once I sort workers by age and education. A general implication of the analysis is that the responsiveness of unemployment to stimulus policies increases substantially during recessions.

Entry and Exit, Unemployment, and the Business Cycle

“…The lotteries model is excluded since it does not include unemployment or vacancies. consistent with the findings in Sichel (1993), Ferraro (2018), and Dupraz et al (2019). The baseline model provides a strong account of the data, almost exactly matching the standard deviation and positive skewness.…”

“…In addition to output, our model is consistent with two well-documented asymmetries in the labor market: peaks in the unemployment rate are further from trend than troughs (Dupraz et al, 2019;Sichel, 1993), and the unemployment rate rises much faster than it declines (Ferraro, 2018;Neftci, 1984). Empirically, these asymmetries are measured by skewness in detrended levels (0.6) and growth rates (1.3).…”

“…Recent work has also examined asymmetries in the growth rate in unemployment (steepness asymmetry), which capture the fast rises and slow declines of unemployment in the data. Ferraro (2017) shows that a standard search and matching model cannot generate this pattern. Consist with his results, we find the model without entry and exit generates no steepness asymmetry.…”

“…Ilut et al (2018) show the volatility and skewness in aggregate employment dynamics follow from asymmetry in how firms respond to information. Ferraro (2018) explains the asymmetry in unemployment dynamics through the lens of a labor search model with heterogeneity in workers' productivity. Dupraz et al (2019) show downward wage rigidity generates negative skewness in employment and asymmetry in the speeds of recessions and recoveries.…”

Advance Layoff Notices and Labor Market Forecasting

“…In contrast, W ARN t displays more skew with larger peaks in the recessions. This asymmetry better matches U.S. labor market data (for example, see Ferraro, 2018), which may help explain why W ARN t forecasts employment changes better than the WARN factor in the next section.…”