Labor-Market Hysteresis and Persistent Paradox-of-Thrift Recessions

Join us for this weeks Macroeconomics Research Seminar, Autumn Term 2020.

Dr Erik Öberg from the Department of Economics, at the University of Uppsala will present their research on Labor-Market Hysteresis and Persistent Paradox-of-Thrift Recessions. 

Abstract

Following the recent disruption in production due to COVID-19, we investigate
whether temporary adverse shocks can result in persistent demand-driven recessions
through sluggish labor-market dynamics. We consider an incomplete-markets model
with sticky prices and search frictions, and show how introducing sluggish vacancy
creation and endogenous layoffs gives rise to a powerful and persistent feedback loop
between unemployment risk and aggregate demand. Endogenous layoffs are central
because they generate a rapid rise in unemployment following a temporary shock.
Sluggish vacancy creation is central because it implies that job-finding rates remain
persistently low following the surge in layoffs. As a result, the negative feedback loop
continues even after the initial shock dies out. The feedback mechanism is weak in
the corner cases of either free entry, exogenous separations or complete markets. The
model provides justification for using match-saving subsidies to stabilize the business
cycle.

This seminar will be held via webinar on Zoom. This event is open to all levels of study and is also open to the public. To register your place and gain access to the webinar, please contact the seminar organisers.

This event is part of the Macroeconomics Research Seminar Series.