The Cyclical Behavior of Equilibrium Unemployment and Vacancies across OECD Countries

Abstract

We show that the inability of a standardly calibrated labor search-and-matching model to account for observed levels of labor market volatility extends beyond the U.S. to a set of OECD countries. That is, the volatility puzzle is ubiquitous. We argue that cross-country data is helpful in scrutinizing between potential solutions to this puzzle. To illustrate this, we show that the solution proposed in Hagedorn and Manovskii (2008) is rather fragile and fails for some countries in our sample. It delivers counterfactually low volatility for economies where the elasticity of wages with respect to productivity is suffi ciently high and where productivity persistence and/or vacancy-fi lling rates are suffi ciently low.JEL Classication: E24, E32, J63, J64.

Search, shirking and labor market volatility

“…Shimer (2005) assumes that q in steady-state and uses this assumption to derive a measure of vacancy costs. 1 reported in Shimer (2005); column (ii) shows the simulated volatilities from our model; columns (iii)-(iv) show, for comparison, the simulation results reported by Hagedorn and Manovskii (2008) and Shimer (2005). The volatility of unemployment in the data is 0.190; in our simulations it is 0.190.…”

“…First, we can analyse the performance of the model in di erent environments, for example in the European labour market where the vacancy-®lling rate is lower than in the US. Doing so has proved a challenge for existing models of serach frictions (eg Amaral and Tasci, 2016). Second, we might use our model to address the changes in the cyclicality of the US and other labour markets that have been identi®ed by, among others, Gali and van Rens (2014), in which the volatility of employment and wages has increased.…”

“…1 Amaral et al (2016) raise concerns about the parameterisation ofHagedorn and Makovskii (2008), arguing that their results rely on a small elasticity of wages, contrary to evidence includingPissarides (2009).…”

“…Since vacancies are low relative to the number of unemployed workers, vacancies are ®lled quickly. This high vacancy ®lling rate implies that hiring is highly sensitive to the number of vacancies; as a consequence, variations in job vacancies in response to shocks lead to large variations in unemployment 1 Since a low rate of pro®t implies that vacancies are highly sensitive to ouput, unemployment is highly sensitive to productivity shocks In the standard search frictions model, volatilities of key labour market variables comparable to those observed in the data are only obtained if workers have very little bargaining power and if the value of leisure is large (Hagedorn and Makovskii, 2008). This is problematic as it is not consistent with standard calibrated parameter values used in the literature 2 .…”

“…In our model, large volatilities are obtained using using standard parameter calibrations 3 . 1 Amaral et al (2016) emphasise the importance of a high vacancy-®lling rate in addressing the unemployment volatility puzzle. The low simulated vacancy-®lling rate obtained in Shimer (2005) is central in generating small volatilities of unemployment and vacancies.…”