Unemployment Crises

The paper titled "Unemployment Crises" (with Nicolas Petrosky-Nadeau) is now forthcoming at Journal of Monetary Economics.

Our historical time series for U.S. unemployment rates and labor productivity (January 1890-December 2017) as well as vacancy rates (January 1919-December 2017) are available to download at this link. Nicolas and I have been as careful as we can when compiling the historical series, by building on the latest economic history literature.

The following picture is the U.S. historical Beveridge curve. The convexity clearly indicates the congestion externality arising from matching frictions in the labor market. More important, the prewar observations, especially those from the Great Depression, make the Beveridge curve substantially flatter than it otherwise would have been. The 2007-2009 Great Recession is well aligned with the overall curve even without the Great Depression.

Theoretically, we show that a search model of equilibrium unemployment, when calibrated to the mean and volatility of the postwar unemployment rates, implies empirically plausible persistence and unconditional probability of unemployment crises (states with the unemployment rates above 15%).

We also implement a Cole-Ohanion style accounting exercise for the Great Depression, but within the search framework. With a measured negative labor productivity shock that amounts to a magnitude of 3.4 unconditional standard deviations in the postwar sample, the model predicts a 35.8% drop in output from 1929 to 1933 and a high unemployment rate of 32.9% in June 1933. Both are empirically plausible. We also demonstrate the impact of detrending on the accounting exercise, a point that has not been emphasized in the prior literature.

All in all, we suggest that a unified search model with the same parameters is a good start to understanding labor market dynamics in both the pre- and post-war samples simultaneously.