This paper was the basis for Sargent's Presidential Address to the 2005 World Congress of the Econometric Society. Our computational experiments were earlier circulated under the title “Obsolescence, Uncertainty, and Heterogeneity: The European Employment Experience.” We thank the referees and the editor as well as Olivier Blanchard, Robert Hall, Daniel Hamermesh, James Heckman, Charles Jones, Kenneth Judd, Narayana Kocherlakota, Justin Wolfers, and seminar participants at various institutions for criticisms and suggestions. We are grateful to Mariacristina De Nardi, Juha Seppälä, Christopher Sleet, Chao Wei, and Rui Zhao for excellent computational help at various points in time. Ljungqvist's research was supported by a grant from the Jan Wallander and Tom Hedelius Foundation. Sargent's research was supported by a grant to the National Bureau of Economic Research from the National Science Foundation.
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Two Questions about European Unemployment
Article first published online: 19 FEB 2008
DOI: 10.1111/j.0012-9682.2008.00816.x
Additional Information
How to Cite
Ljungqvist, L. and Sargent, T. J. (2008), Two Questions about European Unemployment. Econometrica, 76: 1–29. doi: 10.1111/j.0012-9682.2008.00816.x
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This paper was the basis for Sargent's Presidential Address to the 2005 World Congress of the Econometric Society. Our computational experiments were earlier circulated under the title “Obsolescence, Uncertainty, and Heterogeneity: The European Employment Experience.” We thank the referees and the editor as well as Olivier Blanchard, Robert Hall, Daniel Hamermesh, James Heckman, Charles Jones, Kenneth Judd, Narayana Kocherlakota, Justin Wolfers, and seminar participants at various institutions for criticisms and suggestions. We are grateful to Mariacristina De Nardi, Juha Seppälä, Christopher Sleet, Chao Wei, and Rui Zhao for excellent computational help at various points in time. Ljungqvist's research was supported by a grant from the Jan Wallander and Tom Hedelius Foundation. Sargent's research was supported by a grant to the National Bureau of Economic Research from the National Science Foundation.
Publication History
- Issue published online: 19 FEB 2008
- Article first published online: 19 FEB 2008
- Manuscript received September, 2005; final revision received February, 2007.
- Abstract
- References
- Cited By
Keywords:
- Job;
- search;
- skills;
- obsolescence;
- turbulence;
- unemployment;
- unemployment insurance;
- employment protection;
- discouraged worker
A general equilibrium search model makes layoff costs affect the aggregate unemployment rate in ways that depend on equilibrium proportions of frictional and structural unemployment that in turn depend on the generosity of government unemployment benefits and skill losses among newly displaced workers. The model explains how, before the 1970s, lower flows into unemployment gave Europe lower unemployment rates than the United States and also how, after 1980, higher durations have kept unemployment rates in Europe persistently higher than in the United States. These outcomes arise from the way Europe's higher firing costs and more generous unemployment compensation make its unemployment rate respond to bigger skill losses among newly displaced workers. Those bigger skill losses also explain why U.S. workers have experienced more earnings volatility since 1980 and why, especially among older workers, hazard rates of gaining employment in Europe now fall sharply with increases in the duration of unemployment.