published in: Journal of the European Economic Association, 2005, 3 (6), 1360-1385
According to Ljungqvist and Sargent (1998), high European unemployment since the 1980s
can be explained by a rise in economic turbulence, leading to greater numbers of
unemployed workers with obsolete skills. These workers refuse new jobs due to high
unemployment benefits. In this paper we reassess the turbulence-unemployment relationship
using a matching model with endogenous job destruction. In our model, higher turbulence
reduces the incentives of employed workers to leave their jobs. If turbulence has only a tiny
effect on the skills of workers experiencing endogenous separation, then the results of
Ljungqvist and Sargent (1998, 2004) are reversed, and higher turbulence leads to a
reduction in unemployment. Thus, changes in turbulence cannot provide an explanation for
European unemployment that reconciles the incentives of both unemployed and employed
workers.
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