Frictional Unemployment with Stochastic Bubbles

Guillaume Vuillemey (1, 2) , Etienne Wasmer (3, 4)

1 HEC Paris - Ecole des Hautes Etudes Commerciales
2 CEPR - Center for Economic Policy Research
3 ECON - Département d'économie (Sciences Po)
4 New York University [Abu Dhabi]

We show that the volatility puzzle in labor economics (Shimer, 2005) stems from the inability of technology shocks to generate sufficient volatility of firm value. We introduce non-fundamental shocks to firm value, akin to bubbles, into an otherwise standard search-and-matching model. When calibrated to stock market data, stochastic bubbles significantly improve the ability of the matching model to quantitatively explain the volatility of the US labor market. An extension with multiple sectors improves the persistence of simulated labor market variables.

Mots clés: Unemployment volatility; Labour frictions; Bubbles

Domaines: Economies et finances

Guillaume Vuillemey, Etienne Wasmer. Frictional Unemployment with Stochastic Bubbles. European Economic Review, 2020, 122, ⟨10.1016/j.euroecorev.2019.103352⟩. ⟨hal-03950264⟩