Research

This paper quantifies the effects of the increasing maximum unemployment insurance (UI) duration during recessions on the drop in the correlation between output and labour productivity in the U.S. since the early 1980’s - the so-called productivity puzzle. Using a general equilibrium search and matching model with stochastic UI duration, heterogeneous match quality, variable search intensity and on-the-job search, I demonstrate that the model can explain over 40 percent of the drop in this correlation (28 percent when the Great Moderation is taken into account). More generous UI extensions during recent recessions cause workers to be more selective with job offers and lower job search effort. The former channel raises the overall productivity in bad times. The latter prolongs UI extensions since in the U.S. they are triggered by high unemployment. 

Standard search theory suggests that (1) job search intensity increases with the relative gain from searching, and that (2) job search intensity increases the job finding probability. Firstly, this paper presents new empirical findings that challenge these theoretical predictions when workers are categorised by their unemployment insurance (UI) history. Unemployed workers who are either current or former UI recipients search harder than those who never take up UI during their current unemployment spells. What's more, despite their higher search intensity, those with UI history have a lower probability of finding a job. Subsequently, I introduce inefficient job search, consistent with these empirical findings, to an otherwise standard equilibrium search-and-matching model with endogenous search intensity. Three key results follow from the introduction of inefficient job search: (1) aggregate search intensity becomes acyclical, (2) it dampens labour market fluctuations and the general equilibrium effects of UI extensions, and (3) it increases the persistence of unemployment and its duration.

This paper investigates the impact of endogenous unemployment insurance (UI) extensions on the dynamics of unemployment and its duration distribution in the US. Using a random search and matching model with worker heterogeneity, I allow for the maximum UI duration to endogenously depend on the unemployment rate and for UI benefits to depend on relevant worker characteristics replicating the US benefit system. I find that, during the Great Recession, UI extensions have a moderate effect on total unemployment via job separations and a large effect on long-term unemployment via job search responses. Worker heterogeneity is essential in explaining the dynamics of the unemployment duration structure via heterogeneous job finding rates. Disregarding the rational expectations about the likelihood of UI extensions implies an overestimation of the unemployment rate by over 2 percentage points.

This paper studies the effects of shocks to the flow hazards into and out of unemployment on the aggregate household saving rate, and attempts to explain the spike in the US saving rate during the Great Recession with these shocks. The results are obtained from a Dynamic Stochastic General Equilibrium model under incomplete markets and borrowing constraints similar to Krusell and Smith (1998) using extended path algorithm, perturbation method and approximate aggregation. It is found that a negative job finding shock and a positive job separation shock simultaneously and separately contribute to an increase in the saving rate. Shocks to job finding probability create a more drastic and persistent impact on the saving rate than do shocks to job separation probability. The model can generate saving rates that show strikingly similar dynamics to the US saving rate; however, the magnitude of responses from the model is quite far from the data. Job finding shocks alone explain almost all the dynamics of the saving rate during the Great Recession while both shocks need to be in place to explain saving movements during non-recessionary periods. The same analysis under the complete market assumption yields results completely opposite to the data.

We develop an equilibrium search model with endogenous labour force participation and countercyclical unemployment insurance (UI) extensions. Workers optimally search for jobs and their search intensity increases with the return from searching. Despite negative aggregate shocks, countercyclical UI extensions provide incentive to search on the extensive margin during recessions. We use the model to explain the cyclical properties of the transition rate from employment to out-of-labour-force (E2O). As in the US data, the model predicts that E2O is procyclical. This property is in stark contrast to the prediction of the standard search theory (without countercyclical UI extensions) that the labour force participation should increase in booms. We also find that the role of reverse added worker effect on the E2O transitions is relatively limited.