The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?

Authors

  • Christopher A. Pissarides

    1. Centre for Economic Performance, London School of Economics, Houghton Street, London WC2A 2AE, U.K. and IZA, Bonn and CEPR, London; c.pissarides@lse.ac.uk
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    • The Walras–Bowley lecture, North American Summer Meetings of the Econometric Society, Duke University, June 2007. I am grateful to the editor Daron Acemoglu and the referees for their extensive comments, and to Antonio Antunes, Christian Haefke, Robert Hall, John Kennan, Per Krusell, Iourii Manovskii, Rachel Ngai, Michael Reiter, Robert Shimer and Gary Solon for comments and discussion. Pedro Gomes provided research assistance. Partial funding for this study was provided by the Centre for Economic Performance, a designated research center of the ESRC.


Abstract

I discuss the failure of the canonical search and matching model to match the cyclical volatility in the job finding rate. I show that job creation in the model is influenced by wages in new matches. I summarize microeconometric evidence and find that wages in new matches are volatile and consistent with the model's key predictions. Therefore, explanations of the unemployment volatility puzzle have to preserve the cyclical volatility of wages. I discuss a modification of the model, based on fixed matching costs, that can increase cyclical unemployment volatility and is consistent with wage flexibility in new matches.

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