Endogenous Separations, Wage Rigidities, and Unemployment Volatility

We show that in microdata, as well as in a search and matching model with flexible wages for new hires, wage rigidities of incumbent workers have substantial effects on separations and unemployment volatility. Allowing for an empirically relevant degree of wage rigidities for incumbent workers drives unemployment volatility as well as the volatility of vacancies and tightness to that in the data. Thus, the degree of wage rigidity for newly hired workers is not a sufficient statistic for determining the effect of wage rigidities on macroeconomic outcomes. This finding affects the interpretation of a large empirical literature on wage rigidities. (JEL E24, J23, J31, J41, J63)

Nonlinear Unemployment Effects of the Inflation Tax

We argue that long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks – productivity and monetary – and frictions in labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it sensitive to productivity shocks or to further increases in inflation. We calibrate the model to match the U.S. postwar labor market and monetary data, and show that it is consistent with observed cross-country correlations. The model implies that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate shocks.

Political economy of central-bank mandates in developing countries

In this paper, I explain theoretically the coordination and conflict scheme of fiscal and monetary policy workings, and then empirically assess the effect of both inflation-targeting and non-inflation-only targeting policies on inflation and unemployment rates. I employ a difference-in-difference method to estimate the impact on inflation, the unemployment rate, and their volatilities in both 10 inflation-targeting (single-mandate) and 11 non-inflation-targeting (multiple-mandate) countries specifically from the sample of developing economies over the period from 1998 to 2018. Our key findings show that while the inflation-targeting countries effectively present a reduction in inflation and inflation volatility, the effects on the unemployment rate are negligible, while unemployment volatility is higher in the period 1998–2008. Finally, the paper argues that the unemployment rate should be used as a natural second target in a typical emerging-market economy case.

Informal work along the business cycle: evidence from Argentina

This article sheds light on the dynamics of the Argentine labor market, using quarterly data from the Argentine Labor Force Survey for the period 2003Q3 to 2020Q1. We examine quarterly transition rates in a four-state model with formal employment, informal employment, unemployment, and nonparticipation. We compute the contribution of each transition rate to fluctuations in unemployment and informality rates. We identify five stylized facts: (i) Nearly 40% of the fluctuations in the unemployment rate involves unemployment ins and outs from/to informal jobs. (ii) More than 40% of the fluctuations in informality rate are driven by the variance of the formalization rate (transition from informal to formal employment). (iii) Non-participation matters for the understanding of unemployment volatility but also for the comprehension of the volatility on informality. (iv) Regarding gender differences: transition involving non-participation matters more in the variance of female unemployment and informality rates than for their male counterparts. (v) The informal sector plays an important role as a stepping stone to formal jobs for both men and women. Our article provides empirical targets to discipline theoretical modeling of labor market dynamics with a sizeable shadow economy.

A NOTE ON THE UNEMPLOYMENT VOLATILITY PUZZLE: IS CREDIBLE WAGE BARGAINING THE ANSWER?

This paper shows that the ability of the credible wage bargaining model to match the observed unemployment volatility hinges on an unrealistic assumption about disagreement payoffs to the firm. Relaxing this assumption can lead to the substantial wage flexibility. As a consequence, the model is unable to capture the observed unemployment volatility.

Do Job Destruction Shocks Matter in the Theory of Unemployment

Because the data show that market tightness is not orthogonal to unemployment, this paper identifies the many empirical difficulties caused by adopting the free entry of vacancies assumption in the Diamond-Mortensen-Pissarides (DMP) framework. Relaxing the free entry assumption and using Simulated Method of Moments (SMM) finds the vacancy creation process is less than infinitely elastic. Because a recession-leading job separation shock then causes vacancies to fall as unemployment increases, the ad hoc restriction to zero job separation shocks (to generate Beveridge curve dynamics) becomes redundant. In contrast to standard arguments, the calibrated model finds the job separation process drives unemployment volatility over the cycle. (JEL E24, E32, J24, J63, J64)