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    State dependence in labor market fluctuations: evidence, theory, and policy implications

    Pizzinelli, C. and Theodoridis, K. and Zanetti, F. (2018) State dependence in labor market fluctuations: evidence, theory, and policy implications. Working Paper. Birkbeck, University of London, London, UK.

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    This paper documents state dependence in labor market uctuations. Using a Threshold Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job finding rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-specific idiosyncratic productivity. State dependence implies that the effect of labor market reforms is different across phases of the business cycle. A permanent removal of layoff taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low-productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity.


    Item Type: Monograph (Working Paper)
    Additional Information: BCAM 1801; ISSN 1745-8587
    Keyword(s) / Subject(s): Search and Matching Models, State Dependence in Business Cycles, Threshold Vector Autoregression
    School: Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
    Research Centres and Institutes: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Administrator
    Date Deposited: 21 Mar 2019 16:22
    Last Modified: 02 Aug 2023 17:49


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