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Economic Perspectives, Vol. 31, 2007
New Evidence on Labor Market Dynamics over the Business Cycle
Does unemployment rise in a recession mainly because workers lose their jobs at a higher rate or because already unemployed workers are less likely to be hired during a downturn? The answer to this question has important implications for how one thinks about cyclical fluctuations in the economy and policies to address unemployment. For example, one prominent view of the business cycle posits that economic downturns are periods where there has been an adverse shock to productivity that makes the match between employers and workers less profitable. This, in turn, leads firms to increase layoffs. Under this view, the authors would expect to see much greater cyclicality in the rate of job separation (movements from employment to unemployment) compared with the rate of job finding (movements from unemployment to employment). An alternative view is that there might be reasons why firms prefer to create vacancies during economic upswings, in which case the authors would expect to see more variability in the job hiring rate over the business cycle. Clearly, documenting the cyclical patterns in job finding and job separation ought to provide important empirical evidence to help distinguish between competing views of unemployment fluctuations and perhaps help guide the development of new theories of the business cycle.
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