WORKING PAPER 2001:4. Skill loss, ranking of job applicants, and the dynamics of unemployment. Stefan Eriksson

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1 IFAU - OFFICE OF ABOUR MARKET POICY EVAUATION kill lo, akig of job applica, ad he dyamic of employme efa Eiko WORKING PAPER 00:

2 kill lo, akig of job applica, ad he dyamic of employme * by efa Eiko Apil 7, 00 Abac: Thi pape iveigae he coeece of kill lo a a el of employme i a efficiecy wage model wih ove co ad o-he-job each. Fim ae able o diffeeiae wage ad heefoe pefe o hie employed eache o employed woke who have o lo hma capial. I i how ha if ome fdameal faco i he ecoomy chage, hi will el i a leghy adjme poce wih baial log employme effec. Moeove, he model i capable of geeaig peiece b he amo deped o he daio of he hock ielf. Keywod: Efficiecy wage, Tove, O-he-job each, kill lo, Peiece, ho- ad log-em employme. JE claificaio: E, J6. * I wold like o hak Mikael Calo, Nil Gofie, Beil Holmld, Eik Mellade, Oka Nodöm ka, Tobe Taæ ad emia paicipa a he Office of abo Make Policy Evalaio ad Uppala Uiveiy fo valable comme ad ggeio. Fiacial ppo fom he Office of abo Make Policy Evalaio i gaeflly ackowledged. Depame of Ecoomic, Uppala Uiveiy, Box 5, E-75 0 Uppala, wede, elephoe 6 8 7, efa.eiko@ek..e.

3 Mo Eopea coie ffe fom a choically high employme ae. I majo coieal ecoomie, ch a Gemay ad Face, aod e pe ce of he labo foce i employed. Moeove, almo half ae claified a log-em employed; i.e. hey have bee employed fo welve moh o moe. Aohe fac i ha hock eem o have effec o employme log afe he hock hemelve have diappeaed. Fo ome eao i eem o ake coideable ime fo Eopea ecoomie o e o hei eilibim employme level followig a hock. Thi make i impoa o y o dead how hock, boh empoay ad pemae, affec he employme level. Oe poeial explaaio of boh he high level of employme ad i peie behavio followig a hock i ha he daio ce of employme omehow play a ole. May aho have aged ha log em employed woke do o compee well wih ohe eache fo he available job becae hey have lo he abiliie ha employe fid aacive ec. I i he aged ha hi daio depedece, hogh ome mechaim, affec he wage eig i he ecoomy, ad h p pwad pee o wage. Oe impoa pape ha ie o fomalize hee idea i Blachad ad Diamod (99, who examie he effec of he compoiio of employme o wage deemiaio i a machig model. They ame ha a fim ha eceive mliple job applicaio alway pick he applica wih he hoe employme pell; a aegy hey call akig. The wage i deemied by Nah bagaiig wih he expeced iliy of a ecely laid off woke a he hea poi. Thei mai coclio i ha akig affec he dyamic b ha oly mio pemae effec. I hi pape he coeece of kill lo a a el of employme i died fhe by aalyzig a ew mechaim hogh which he daio ce of employme affec he wage eig. Thi i doe by adapig he efficiecy wage model wih ove co ad o-he-job each developed i Eiko ad Gofie (000, o a iaio wih wo diffee ype of employed woke; oe gop ha i ideical o employed woke ad oe gop ha i le aacive o hie. Machi ad Maig (999 dic hee ie i ome deail ad alo vey he lieae. Eiko ad Gofie (000 foc o a iaio whee employe dicimiae agai all employed woke, ad h do o coide he daio ce of employme.

4 Thee ae a mbe of eao why a peo who i employed fo ome ime migh loe ome of hi hma capial. Iabiliy o keep p wih echological advace, lo of ocial kill ad lo of moivaio ca make i le aacive fo employe o hie employed woke. Thee faco hold be paiclaly eleva fo hoe who have bee employed fo a log ime. A he ame ime, i i hadly likely ha all woke ffe a lo of hma capial afe a pecific daio of employme (e.g. welve moh b ahe ha he imig diffe bewee idividal woke. ome woke loe kill apidly while ohe maiai hem fo a log peiod of ime. To cape hee fac he model coai wo ock of employed woke called hoem employed (TU ad log-em employed (TU, whee woke i he ecod gop have ffeed a lo of hma capial. Evey TU woke face a coa ik of becomig TU evey peiod. If wage wee pefecly flexible, fim hold be idiffee amog all job applica ice he wage ca be adjed o eflec diffeece i podciviy/aiig co. I eal wold labo make hi i hadly he cae, becae faco ch a faie coideaio, io iflece, employme iace ad miimm wage ed o compe wage elaive o podciviy diffeeial. I ch a iaio employe have iceive o cee job applica fo diffeece i podciviy/aiig co ad he hie hoe wih he be coe. Hece, employed woke ha have lo ome of hei hma capial will o ge hied if he employe eceive eogh applicaio fom ohe moe podcive eache. Th, hee migh be complee dicimiaio of hoe i TU. A he ame ime hee ae wo faco ha migh peve hi. Fi, o all job ae he ame. Diffeece i hma capial ae impoa fo ome job while hey ae mch le impoa i ohe ype of job. ecod, a lo of ohe faco ha peceived podciviy/aiig co diffeece eem o affec he hiig poce. To cape hee fac i he model i i amed ha, fo a facio of he job, fim pefe o hie employed o TU applica while fo he e of he job hey ae idiffee amog all applica. I hi pape, a heoeical model wih hee feae i e p. Fim e hei wage ecogizig ha labo ove i coly ice hey ecoe a hiig/aiig co fo evey ewly hied woke. Employed woke chooe whehe o o o each baed o boh he wage ad hei job aifacio. Thoe who loe hei job become

5 TU ad face a ik of becomig TU evey peiod. eache ed i job applicaio o a adomly choe fim ad fim he chooe whom o hie fom he pile of applicaio. A meioed above, fim dicimiae agai he TU fo a facio of he available job. The model i he olved fo a geeal eilibim olio. De o he complexiy of he model meical olio mehod ae ed. The model i calibaed wih daa fo he Gema ecoomy, ad i i iveigaed wha happe, boh i ad o of eady ae, whe diffee paamee ae chaged. The eady ae aalyi how ha moe akig, a highe ik o become TU o moe wage pee all aie eilibim employme, ad ha he effec ae coceaed o he ock of TU woke. I i alo how ha ie mode pemae chage i he key paamee i he model will el i vey leghy adjme pocee, ivolvig baial log effec o he employme level. Fo example, a pemae iceae i he pobabiliy o become TU - e.g. de o moe apid echological advace - el i a iaio whee he employme ae iceae fo yea il eachig i ew eady ae vale. If ch low adjme pocee ae a feae of eal ecoomie i i o piig ha ecoomi have difficlie fidig he cal cae of he ie i Eopea employme. The dyamic aalyi how ha empoay hock have peie effec, b he degee of peiece i ie modeae afe a empoay hock o employme. A pologed hock whee may woke fall io TU geeae moe peiece. ill i i difficl o geeae he exeme amo of peiece fod i ime eie egeio fo employme. Howeve, i hold be emembeed ha he model abac fom a lo of ohe faco ha pobably alo add o peiece. The model peeed hee diffe i a mbe of way fom he aalyi i Blachad ad Diamod (99. Mo impoaly boh he wage eig ampio ad he mechaim hogh which he daio ce of employme affec he wage eig diffe baially. Fi, he ai labo pply cve implied by Nah bagaiig wih employme a he hea poi i eplaced by a efficiecy wage coai. ecod, he daio ce affec he pobabiliy ha a employed eache ge he job he applie fo, idcig he fim o e a highe wage o keep coly ove dow. I Blachad ad Diamod, he daio ce of employme affec he oide opio i he wage egoiaio. I i hee wo fac ha explai he

6 lage pemae effec fod i my pape. I Blachad ad Diamod he hea poi of he woke i affeced by he fac ha he a ik of becomig log em employed himelf. Ule he dico ae of he woke i vey high hi will ed o keep he wage fom iig i he log. I my pape i i opimal fo he fim o aie i wage a i ow iiiaive followig a ie i he pobabiliy o ge a job fo ohe-job eache ad hi ha ohig o do wih he iliy woke ge if hey become employed. Aohe diffeece i ha while Blachad ad Diamod ame ha he peo wih he hoe pell i alway pefeed, woke i hi model loe hma capial ochaically a diffee poi i ime, h addig a bi of ealim. A ecod elaed pape i Piaide (99 who fomlae a machig model wih he o called hi make exealiy ; i.e. ha he pply of job deceae whe he daio of employme iceae ice hoe who have bee employed fo a log ime have le hma capial. I ha model, a employe alway hie he fi employed woke he come i coac wih. Th, Piaide abac fom he behavio of he employe i he hiig poce, he foc i hi pape. The e of he pape i ogaized a follow. ecio I biefly dice empiical evidece o he employabiliy of TU woke. I ecio II he heoeical model i fomlaed, he geeal eilibim i deived ad ome aalyical el ae how. I ecio III he model i calibaed wih Gema labo make daa ad he effec of paamee chage ad hock ae aalyzed boh i eady ae ad dyamically. ecio IV coclde he dicio. I Empiical Evidece o he Employabiliy of TU Woke Two empiical eio ae paiclaly eleva fo he pee aalyi. Fi, doe he pobabiliy o fid egla employme declie wih he daio of employme? ecod, do employe dicimiae agai TU woke? The fi eio i aalyzed i he baial lieae o daio depedece. I i faily clea fom aw daa ha he exi ae fom employme declie wih he daio of employme fo mo Eopea ecoomie. Howeve, Ohe elaed pape ae Acemogl (995 ad ockwood (99 ha boh foc o a iaio whee employe cao pefecly obeve he podciviy of employed woke ad heefoe e aiical dicimiaio agai hem. jgvi ad age (998 y o explai he high ad peie employme ae fom he pply ide by agig ha geeo welfae beefi ecoage woke, who have lo hma capial, o demad highe wage ha employe ae willig o pay.

7 he moe ieeig eio i if hee exi o called e daio depedece; i.e. whehe he pobabiliy o leave employme fo a paicla woke declie wih he daio of hi employme. Eeially, hi boil dow o yig o elimiae obeved a well a obeved heeogeeiy. Machi ad Maig (999 eview hi ie i ome deph. They poi o ha i ode o obai ideificaio i i omally eceay o make ampio abo he pecific fcioal fom of he baelie hazad fcio ad he diibio of obeved heeogeeiy. Moeove, hey coclde i doe o eem poible o ideify epaaely he effec of heeogeeiy fom ha of daio depedece wiho makig ome vey og ampio abo fcioal fom which have o fodaio i ay ecoomic heoy 5. Thi, a he vey lea, implie ha oe hold be vey caefl whe iepeig el o daio depedece. Tig ow o he die ha have bee pefomed he el ae mixed. A paiclaly lage mbe of die have looked a daa fo he UK ad wede. die of UK daa omally fid og evidece of egaive daio depedece while die ig wedih daa fid oly weak o eve poiive daio depedece. die of daa fo ohe Eopea coie ae moe ae b ofe do o fid og daio depedece. Thee faco migh complicae he iepeaio of hee el. The fi i exi o o-of-he labo foce. A mbe of die of daio depedece do o diigih bewee exi o diffee ae wheea ohe do. 6 ecod, Piaide (99 emphaize ha ice mo die ae co ecio hey e ample ha do o coai vey log daio. Thi ca el i a iaio whee oo mch of he daio depedece i claified a beig de o heeogeeiy. 7 Thid, he widepead e of acive labo make policy ca el i beak i employme pell ad eclaificaio of woke a ewly employed. The coclio fom he empiical die of daio depedece eem o be ha i ill i ceai whehe hi i a impoa poblem o o. The eeach o fa how ha i i a poblem i ome coie, ch a he UK, while i doe o eem o Fo example, a popoioal hazad fcio ad a gamma diibio fo obeved heeogeeiy. 5 Machi ad Maig (999 page. 6 Iiively, i i aal o hik ha exi o o-of-he labo foce exhibi poiive daio depedece; e.g. dicoaged woke effec. 7 Oe example of a dy ha ake acco of hi i Jackma ad ayad (99 who, ig ime eie daa, fid og daio depedece effec fo he UK. 5

8 be a poblem i ohe coie like wede, hogh he exeive e of acive labo make policy may explai he lae fidig. The idea ha employe do view TU a a egaive faco whe makig hiig deciio ha eceived ie og ppo. 8 Bewley (999 ieviewed a lage mbe of employe i he U abo, amog ohe hig, hei hiig pocede. He fid ha a ie baial facio view employme a a egaive faco. Agell ad dbog (999 fid ha aod oe foh of he wedih employe i hei ample view TU a a og egaive igal. 9 Akio, Gile ad Meage (996 fid imila evidece fo he UK. They emphaize ha TU, a lea, make employe picio ha he woke ha lo abiliie like ocial kill ad wok moivaio ec. 0 Kligvall (998 epo ha aod half of he wedih employe i hi vey ae ha he daio of employme i impoa whe evalaig he iabiliy of a applica. The aed eao ae lo of kill a well a lo of ocial abiliie. ayad, Nickell ad Jackma (99 cie eveal die ha idicae ha employme cae demoivaio ad demoalizaio. The coclio fom hi vey ad ieview baed lieae i ha employe eally eem o view TU a a egaive woke chaaceiic fo a baial mbe of job ad ha oe impoa eao fo hi i he belief ha woke loe hma capial while beig employed. Doe employme el i he lo of kill? Thogh he lieae o daio depedece doe o give ay clea awe, he vey baed lieae ppo hi idea. Th, i eem ie likely ha employme el i kill lo ad a decliig pobabiliy o fid a job a he daio of employme iceae. Thi make i impoa o iveigae he coeece of ch behavio heoeically. 8 I hold be oed ha, ice employe ae likely o admi ha hey avoid hiig TU woke, he die meioed pobably oly give a lowe bod o he acal exe of hi ype of dicimiaio. 9 Ohe die ig wedih daa ae Kligvall (998, who epo ha 5 pe ce of fim view woke who have bee employed log favoably, ad Behez ad Delade (998, who epo ha 0 pe ce of fim wold o chooe he employed woke whe havig wo ohewie imila applica o chooe fom. 0 A ieeig fidig i hi dy i ha mo epode did o ppo he idea ha hoe becomig employed ae le podcive ha ohe woke b ahe ha i i employme i ielf ha make TU woke le aacive; i.e. hi dy idicae ha ae depedece i moe impoa ha heeogeeiy. No piigly he daa idicae ha he facio of employe ha view he daio of employme a a impoa faco i a iceaig fcio of daio. The fcio i o mooh b ahe exhibi jmp a -6, 9- ad - moh. 6

9 II The Model Eve ake place i dicee ime ad we may hik of a peiod a oe moh log. Thee ae a lage mbe of woke who ca be i eihe of hee diffee ae; employed, ho-em employed (TU o log-em employed (TU. I hold be oed ha he em ho- ad log-em ae o eivale wih he defiiio omally fod i labo make aiic. I hi model, a peo who ha become employed face a ik of becomig TU evey peiod ahe ha aomaically fallig io TU afe ix o welve moh. A he ame ime he em TU ad TU ae appopiae ice, o aveage, a peo belogig o he TU gop ha bee employed a loge ime ad i expeced o emai employed fo a loge peiod of ime. The oal labo foce i amed o be coa ad i omalized o oe. Thee ae a lage mbe of ideical fim i he ecoomy, alhogh he fixed mbe of fim i mch malle ha he mbe of woke. The eece of eve i he model i he followig. A he begiig of evey peiod a exogeo facio,, of he employed woke loe hei job ad fall io TU. Thi facio iclde boh woke iig io employme ad woke beig laid off fo ome exogeo eao. Fim e hei wage ecogizig ha wage affec ove. Tove i coly ice fim have o pay a hiig/aiig co fo evey ewly hied woke. Thoe emaiig employed chooe whehe o o o each o he job coideig boh he wage level offeed by hei pee employe ad hei job aifacio. A exogeo facio,, of he woke i TU, icldig hoe who j became employed, he fall io TU. O-he-job eache ad all employed woke he bmi oe applicaio o a adomly choe fim. Fially, fim chooe whom o hie amog he pile of applicaio. Fo a facio,, of he job employe pefe o hie a woke who ha a job o i TU while fo he e of he vaca job employe ae idiffee amog all applica. Fige illae he ock ad flow of he model. A aleaive i o call he TU woke igmaized. The model cold eaily be exeded o a iaio wih a edogeo mbe of fim fo example by impoig ome kid of fixed co. 7

10 Fige A illaio of he ock ad flow i he model. E Job-o-job mobiliy a ( Hiig Qi/layoff Hiig a ( ( a ( ( - TU kill lo ( TU Thee ae hee baic mico-ecoomic deciio ha m be made evey peiod: (i he wage eig deciio made by he fim (ii he deciio whehe o o o each made by evey woke who i employed a he a of he peiod, ad (iii he hiig deciio made by he fim. 5 The followig ecio dic hee deciio aig wih he la, ad decibe he geeal eilibim ocome of he ecoomy. Job Applicaio ad Hiig O-he-job eache ad boh ype of employed woke each wih he ame ieiy. Evey woke lookig fo a ew job bmi oe applicaio pe peiod. Fhemoe, he applicaio ae e o a adomly choe fim. 6 ice hee ae may moe woke ha fim i hi ecoomy, evey fim eceive a lage mbe of applicaio. The ccial ampio i ha a fim alway eceive a fficie mbe of applica, o ha evey vacacy ca be filled wihi he peiod fom he pile of applicaio. Theefoe, he fim ha o make a deciio of whom o hie. The followig ampio ae made: (i fim ca obeve whehe he applica i employed, TU o TU, (ii fo a facio of he job, employed ad TU The oaio will be iodced i he ecio below. 5 The fi wo of hee deciio ae implified veio of hoe aalyzed i Eiko ad Gofie ( Thi i of coe a implificaio of eal wold behavio b, a he ame ime, i eceive ome ppo i empiical wok. ayad, Nickell ad Jackma (99, poi o ha he ime pe o each i faily limied ad doe o eem o dimiih wih he daio of employme i he UK. Bla ad Robi (990 how ha, i a U ample, he each ieiy diffe lile bewee employed ad employed eache. ayad, Nickell ad Jackma (99, epo eimae fo he UK of bewee oe ad hee applicaio beig bmied pe moh. 8

11 applica have ideical aiig co while TU woke have highe aiig co 7, (iii all applica ae eal fo he e of he job, ad (iv he diviio of job bewee hee wo ype i fixed. I ch a iaio oe wold expec he employe o oly coide hiig employed o TU woke fo a facio,, of he job ad chooe a adom applica fo he e of he job. I hi pape, ch a hiig aegy i called akig. O-he-job each Evey woke who emai employed ha o decide whehe o a o-he-job each o o. I i amed ha boh he wage level ad o-peciay faco mae fo he deciio whehe o o o i. 8 e i w ad w deoe he wage i compay i ad he aveage wage epecively. Each peiod evey employed woke daw a mbe ν ha deemie hi ce job diaifacio fom a adom poce wih cdf G(ν which i imodal ad ha a mea malle ha iy. 9 The iliy of a woke i he dicoed m of expeced wage divided by he expeced job diaifacio. ice he woke i back i he ame poiio he ex peiod egadle of whehe he chage job o o, oly he ce peiod payoff affec hi deciio. The woke, heefoe, compae he iliy fom coiig a hi pee job, give by i w / ν, wih he expeced iliy fom fidig a ew job λe [ w / ν ], whee λ < epee he co of i wichig job. 0 Thi mea ha hee exi a c-off vale fo ν i fo which he woke i idiffee bewee iig ad emaiig i hi pee job. I i amed ha λe [ / ν ] < ; i.e. give he ame wage mo woke pefe o ay i hei pee job. The facio of woke ha eache o-he-job i give by: 7 Tha i, i i amed ha afe he aiig all woke ae eally podcive i hee job. Alo oe ha TU woke eve ae employed i hee job ad o fim ed p payig he highe aiig co. Theefoe, hi high aiig co doe o appea i he pofi maximizaio poblem. 8 Akelof, Roe ad Yelle (988 emphaize ha o-peciay faco ae a impoa a he wage level fo i deciio 9 The ampio ha he woke make a idepede ew daw evey peiod i obvioly a implificaio of eal wold behavio. I i moivaed pely by he fac ha he model, ohewie, wold be ovely complicaed o olve ice we wold eed o keep ack of a diibio of woke wih diffee level of job aifacio. 0 Noe ha whe makig hi deciio, he woke kow he aveage wage level, w, b doe o kow he o-peciay faco aociaed wih a ew job. i i i Noe ha ν = w /( wλe( / ν fo he c-off vale of ν. 9

12 i i ( w / w = G( w /( w λe(/ ν, ( whee i deceaig wih (>0. Wage eig Fim ae amed o face a hiig/aiig co fo evey woke hey hie implyig ha labo ove i coly. The hiig/aiig co i give by a coa c ime he aveage wage level w, he podcio fcio i give by θ ( i F whee θ epee a hock faco, volay i ae fficiely lage o accommodae all employme adjme ad fim opimize a if he wold wa kow wih ceaiy. e i deoe he employme level of fim i peiod, a he pobabiliy o fid a job fo a employed/tu woke i peiod ad β he dico faco. The maximizaio poblem olved by he fim i he i i i i i i ( θ F( w cw ( ( ( ( w / w a j max β j j j j j j j j j j w i j, i j j= 0 ( Wih fi ode codiio fo peiod give by. i i '( / ( i c w = w a 0, ( i i i θ F ( w cw βcw ( ( w / w a 0. ( ' = I pacice, he peveio of exceive ove eem o be impoa fo eal wold fim ad hiig/aiig co appea o be baial (ee Blide ad Choi (990 ad Campbell ad Kamlai (997. The aveage wage i ed hee o implify he aalyi. I i poible o explicily icopoae ceaiy i he model ad obai he ame el. To keep he model imple hi i egleced i hi pape. Fo deail of how o model he wage eig wih ceaiy ee Eiko ad Gofie (000. Hee he imig of eve ae he followig: he wage i e, he hock ae obeved ad he he hiig deciio ae made. 0

13 The iiio behid he wage eig mechaim i ha he fim fid i opimal o aie he wage il he magial beefi of he edcio i ove co i eal o he magial co of iceaig he wage. Noe ha i i amed ha he ame wage i e fo all woke. Thi mea ha he fim cao diffeeiae wage accodig o peceived podciviy/aiig co diffeece amog woke. Thee i ome igidiy i he wage ce ha peve ch wage diffeeial. ch a ampio ca be jified by faie coideaio, io iflece o by agig ha fo ome ohe eao hee exi a compay wage policy ha peve wage dipeio. 5 Geeal Eilibim i Coide a ymmeic geeal eilibim whee all fim e he ame wage ( w = w. Thi i he aal iaio o aalyze ice all fim ae amed o be ideical ad, heefoe, face he ame wage eig poblem. e, ad deoe he aggegae level of employme, TU ad TU epecively. Thi give a eaio fo employme (fom he fi ode codiio: = Ω( a, (5 whee Ω=-c (, Ω beig a meae of wage pee de o he efficiecy wage mechaim. 6 Now a, he pobabiliy ha a employed o TU woke ge he job he applie fo, ha o be deemied. Thi pobabiliy i defied a: a ( a( = ( ( ( ( ( ( a( (. (6 5 ee fo example Akelof ad Yelle (990 o Maig (99 fo a dicio abo why a fim migh o wa o diffeeiae wage 6 Iiively, hi faco migh alo iclde ohe faco ha aie he wage like io iflece. ee fo example Gofie ad Weemak (998 fo a dicio of how o model hi.

14 I coi of wo pa; he pobabiliy o ge a job fo which akig i ed pl he pobabiliy o ge a job fo which akig i o ed. Noe ha he mbe of vaca job coi of ew job ad exiig job lef filled afe boh exogeo ad edogeo i. The fi em coi of he facio of job fo which fim ak divided by he mbe of employed woke eachig o-he-job, pl all TU woke. The ecod em compie he facio of job he fim doe o e akig fo divided by all applica. 7 Eaio (6 ca be olved fo a o obai a ( ( ( ( ( ( = ( ( (( ( ( ( ( ( ( ( ( (. (7 e ow o he ae vaiable i he model. The wo employme ock evolve accodig o he followig eaio: a ( (, (8 = ( = a ( (. (9 ( Eaio (8 ay ha he ce ock of TU woke coi of fo compoe; he ock he pevio peiod pl hoe becomig employed mi hoe fidig a job mi hoe who fall io TU. imilaly, eaio (9 ay ha he ce ock of TU woke coi of he ock he pevio peiod pl hoe who become TU i he peiod mi hoe who fid a job. Noe ha a deoe he chace o ge a job fo a woke i he pool of TU ad a deoe he coepodig chace fo a TU woke. Uig eaio (8 ad (9 i (5 give he followig expeio: 7 Noe ha if eal oe we ae back i he iaio aalyzed i Eiko ad Gofie (000; i.e. a employe ha ha a bia agai all employed woke.

15 = ( ( a ( ( ( Ω( a (, (0 = ( a ( ( ( ( ( Ω( a (. ( biig he expeio fo a ad eaio yem which i piciple ca be olved fo hi wold be vey complex ice boh a ad a io eaio (0 ad (, we ge a ad. Aalyically hogh a ae oliea fcio of ad. Fhe aalyi of hi yem i heefoe defeed o he meical ecio below. Iiial Effec of Chage i Paamee Howeve, ome fhe deadig of he model ca be gaied by combiig eaio (5 ad (7 o a dyamic employme eaio: = h,. ( ( Thi eaio i wie o explicily i Appedix ad give he deied aggegae employme i he ce peiod a a fcio of employme ad TU he pevio peiod. Coide fo a mome he iiio behid eaio (. Employme dyamic aie becae he opimal wage deped poiively o he pobabiliy o ge a job fo a employed eache. Theefoe, i i obvio ha he employme level of he pevio peiod mae. The diviio of employme bewee TU ad TU alo mae becae if a lage facio of he employed woke ae i he TU pool hi el i a highe pobabiliy o ge a job fo o-he-job eache. Thi idce fim o aie he wage eve moe o keep hei employee ad, i eilibim, he employme level fall. 8 8 Noe ha a idividal fim peceive hi pobabiliy a exogeo. The oly way fo a fim o edce ove i by aiig he wage o dicoage each amog i employee. ice all fim ae ideical all fim have he ame iceive, all wage ie, ad employme fall.

16 Expeio ( cao be olved fo eady ae employme ice i coai wo ae vaiable b i i poible o ak, fo a give mbe of employed/employed woke i he pevio peiod, wha ae he effec of chage i he paamee o employme. Clealy, hi give oly he iiial effec b i doe povide ome efl iiio. Fi, oe migh be ieeed i he effec of akig o he ce employme level. I Appedix i i how ha < 0. ( I ohe wod, if a lage facio of he vaca job i eeved fo employed ad TU applica we ge a lowe aggegae employme level. If moe job ae eeved fo he pivileged gop hi will ed o iceae he chace fo employed woke o ge a job. To peve coly ove fim will he aie hei wage, leadig o lowe employme. ecod, coide he effec fom fae kill lo amog he employed, which i hi model i caped by a iceae i. I Appedix, i i how ha < 0 if > 0. ( I ohe wod, if he pobabiliy ha a employed woke fall fom TU o TU iceae hi will ed o deceae aggegae employme. Thi el hold oly if ome fim ak job applica ice he diviio of woke bewee TU ad TU wold ohewie be ieleva. The iiio i ha if iceae hi implie a edcio i he pool of pivileged job eeke. Thi iceae he pobabiliy o fid a job fo employed woke, elig i highe wage ad, i eilibim, lowe employme.

17 III Nmeical Aalyi I ode o gai ome fhe deadig of he model, i i efl o e meical vale fo he diffee paamee. Thi make i poible o olve he model fo eady ae vale of employme, TU ad TU ad look a how hee vaiable ae affeced by paamee chage. I addiio, i allow o dy he dyamic adjme poce followig boh pemae ad empoay hock. Chooig eaoable vale fo he paamee, we ca ge a ee of how lage he effec ae ad how log he adjme ake. Calibaio I eady ae he model coai he followig five paamee: (i he facio ha leave employme fo employme evey peiod,, (ii he facio eachig o he job,, (iii he amo of wage pee, Ω, (iv he facio of job fo which fim e akig,, ad (v he ik ha a TU woke face of becomig TU,. Alhogh, eimae of eveal of hee key paamee do o exi, i o ha i i poible o e ohe fac abo he labo make o dedce he vale he paamee have o ake fo he eady ae olio o be coie wih hee fac. To impleme hi aegy i m be decided which fac he model hold be fied agai. Wha i eeded i a lea a may fac a kow paamee, ad pefeably ome moe o check he model agai. Table pee vale fo he Gema ecoomy (all eady ae vale. 9 Eeially, hee fac ae of wo ype; daa abo labo make ock ad flow ad daa abo he pobabiliy o fid a job fo a employed woke a diffee daio of employme. The deail of he daa ae peeed i Appedix. 9 I view of he ppoe of hi pape i i aal o chooe a ypical Eopea coieal ecoomy. 5

18 Table Daa fo he Gema ecoomy. Facio of employed woke eeig employme Facio of employed job-o-job wiche E E x Employme 0.9 moh Pobabiliy o emai employed afe oe moh y 0.90 moh Pobabiliy o emai employed afe hee moh y moh Pobabiliy o emai employed afe ix moh y moh Pobabiliy o emai employed afe ie moh y 0. moh Pobabiliy o emai employed afe welve moh y 0.6 Facio of all employed wih daio < moh 0.5 The oflow ae fom employme U E x Facio eachig o he job (eimae fo he UK 0.05 < moh / To be able o calibae he model we eed a explici defiiio of a eady ae. I i aal o defie i a a iaio whee all ock emai coa. I he coex of hi model hi mea ha he mbe of employed, TU ad TU ae kep coa. Noe ha i i fficie o wie codiio ha ee ha wo of he ock ae kep chaged o kow ha all hee ock emai coa. Theefoe, hee codiio ca be wie i he fom mo beeficial o olvig he model. Fi, o ee ha employme i kep coa i i amed ha eaio (5 aifie: =. (5 = Fhemoe, o keep he wo ock of employed woke coa i i fficie ha he flow i ad o of TU emai eal. Thi eieme ca be wie a: = ( a( (. (6 We alo eed a mbe of eaio likig he fac i Table o he heoeical model. Fi, he facio of employed woke wichig job, E E x, i give by: x E E = a. (7 6

19 ecod, he mbe of woke ha a ay give ime have bee employed fo le ha oe yea i give by: < moh = i= i ( ( a i k= 0 k i= 0 i i ( ( a ( a ( k i. (8 Thid, he pobabiliy o emai employed afe z moh of employme, z y, i give by: z z z z k k zk y = ( ( a ( ( a ( a. (9 k= 0 Foh, a expeio fo he oflow ae fom employme, U E x, ca be deived. ice he oflow fom employme m be eal o he iflow io employme hi i give by: x U E =. (0 The ex ep i o pefom he acal calibaio. The fac epoed wih bold face mbe i Table ae ed o calclae he vale of he paamee ideified above. The fac i he e of he ow ae he ed a a check of he model. The deail of he calibaio mehod ae peeed i Appedix. Thi execie yield he vale mmaized i Table. 7

20 Table Calclaed paamee vale fo he Gema ecoomy. Paamee: Facio of employed woke fallig io TU Facio of employed woke eachig o he job 0.08 Wage pee Ω Facio of job fo which akig i ed 0.97 Rik a TU woke face of becomig TU Implied vaiable vale: TU 0.06 TU 0.00 Pobabiliy o fid a job fo a employed/tu woke a 0.0 Pobabiliy o fid a job fo a TU woke a 0.0 moh Rik of emaiig employed afe hee moh y moh Rik of emaiig employed afe ix moh y moh Rik of emaiig employed afe ie moh y 0. Facio of all employed wih daio < moh < / 0.9 Oflow fom employme U E x 0.07 ookig a he paamee vale i Table i hold be oed ha oe of hem eem eaoable. ice hee do o exi empiical eimae fo eveal of hem i i difficl o jdge he accaee of hee vale b he eade hold oe ha he exac mbe ae o impoa fo he aalyi. Geeally, wha ae ieeig ae he ig ad ogh magide of he effec. I hold be oed ha he calibaio implie ha employed ad TU woke have aod a wo ad a half ime highe pobabiliy o fid a job ha hoe beig TU. eady-ae Aalyi Uig he paamee vale i Table i i poible o iveigae he eady ae effec of paamee chage. Table how he effec of chagig oe paamee a a ime by 0 pe ce of i iiial vale. 8

21 Table eady ae effec of 0 pe ce paamee chage. Bae vale New vale TU TU U Bae cae iceae =0.50 = iceae =0.056 = Ω iceae Ω=9.7 Ω= iceae =0.005 = iceae =0.08 = Ω/ iceae Ω=9.7/=0.50 Ω=.65/= Ω/ iceae Ω=9.7/=0.056 Ω=.65/= / iceae =0.5/=0.056 =0.60/= Now coide hee el i deail. Fi, if he degee of akig i he ecoomy iceae we ee ha hi el i baial iceae i TU ad oal employme while TU emai eeially chaged. The el ha oal employme iceae i expeced fom he pevio dicio. Moe akig implie highe TU fo wo eao. Fi, fo a give mbe of job moe akig implie highe TU ice hee woke face a deceaed chace o fid a job; fewe of he vacacie ae ope o hem. ecod, moe akig ha a egaive effec o he oal mbe of job i he ecoomy ad hi alo implie highe TU. Moeove, hee wo faco have oppoie effec o he ock of TU ad oghly eem o cacel each ohe o. ecod, if he pobabiliy o become TU fo a employed woke iceae we ee ha TU deceae while TU ad oal employme iceae. A wa diced i he pevio ecio, highe lead o a iceaed chace o ge a job fo o-he-job eache, pwad pee o wage ad lowe aggegae employme. Tig o he TU i hold be oed ha hee ae wo oppoig effec a wok hee. Fi, highe mea a iceaed oflow fom TU, which ed o deceae hi ock. ecod, highe mea fewe job i he ecoomy omehig ha implie highe TU. Uig he calclaed vale i eem ha he fi effec domiae; highe ed o edce TU. TU o he ohe had iceae de o boh of he meioed effec. Thid, if he degee of wage pee iceae all employme ock iceae. I hold be oed ha he meical aalyi idicae a diffeece bewee 9

22 he effec of wage pee ad he degee of akig i he ecoomy. Moe akig implie ha he whole iceae i employme i coceaed o TU. Moe wage pee, o he ohe had, el i iceae i boh TU ad TU eve hogh he effec o TU i oge. Foh, a iceae i he flow fom employme o employme implie a iceae i all employme ock. The eao i ha a highe implie moe job vacacie, iceaed oppoiie fo o-he-job eache, pwad pee o wage ad lowe employme. I i aal ha boh ock of employed woke iceae ice ohig eally chage i he elaio bewee TU ad TU. Fifh, a iceae i he mbe of o-he-job eache implie le TU ad oal employme ad eeially o chage i TU. Moe o-he-job eache imply a iceae i he mbe of eache omehig ha idce fim o edce wage ad employ moe woke. Agai hi doe o eally affec he elaive poiio of hoe who ae TU o TU. Fially, i i ieeig o look a lile bi a how Ω, ad ieac. The la hee ow i Table how ha he effec of paamee chage ae eifoced whe we iceae aohe paamee. Thi ca be ee by oig ha he employme ae iceae by moe ha he m of he idividal effec. I ohe wod, if kill lo ad akig ae widepead i a ecoomy hi eifoce he egaive employme effec of iceaed wage pee ec. oo. Befoe leavig he eady ae dicio i i wohwhile o biefly look a diffeece i he effec of he vaio faco ha migh geeae boh peiece ad log effec; wage pee, akig ad kill lo. Iiively, he diffee effec of hee hee faco ca be deood by hikig i em of vivo fcio whee vivig mea emaiig employed afe diffee daio of employme. Thi i illaed i Fige. 0

23 Fige A illaio of he diffee effec of,, ad Ω. Facio emaiig employed Bae cae Rakig/kill lo Wage pee Peiod I Fige he olid cve how he vivo fcio wih he calibaed paamee vale. The ohe wo cve how wha happe whe eihe akig o wage pee ae chaged keepig all ohe paamee coa. Hee, he diffeece bewee chagig he amo of akig ad chagig he amo of wage pee ae appae. Moe wage pee hif he whole cve pwad implyig ha he pobabiliy o ge a job declie a all daio. Moe akig o he ohe had moly ham hoe wih log daio of employme. 0 Dyamic Adjme o Pemae hock A aal aig poi fo a dyamic aalyi i o aalyze wha he adjme pah look like afe a pemae chage i oe o moe of he paamee. ice he iflow ae io employme eem o have emaied vially chaged hi mea ha we have hee faco ha poeially cold have caed iig employme; kill lo, akig ad wage pee. The fi wo may el fom moe apid echological advace o chage i he ogaizaio of fim ha iceae he kill eieme of idividal woke. The lae oe may chage a he el of iceaed aiig co, moe foc o keepig dow ove o iceaed io egh. 0 Thi alo help dead he mbe fallig o of he calibaio. The model i eeially calibaed ig ch a cve a a ip ad he cve ed implie ha he pobabiliy o leave employme declie wih daio. ice Ω cao geeae ch a ocome >0 ad >0 ae eeded. Evidece ha ha emaied eeially chaged ca be fod i ayad, Nickell ad Jackma (99. I i of coe alo poible ha he exe of o-he-job each alo ha iceaed. Remembe ha he effec of iceaed io egh iiively ae ideical o a iceae i Ω.

24 e a by iveigaig he effec of a pemae iceae i he ik o become TU fo a TU woke (. Thi i illaed i Fige. Fige The effec of a 50 pe ce iceae i Uemployme 5 TU TU TUTU Moh Recall he dicio above whee i wa how ha a iceae i lead o lowe TU ad highe TU wih he e effec o employme poiive. I Fige i i clea ha hee effec ae pee b we alo ee ha he imig of he effec diffe makedly. The deceae i TU eem o occ dig he fi few peiod while he iceae i TU i daw o ove a vey log peiod of ime. The implicaio fo a ecoomy, ha fo ome eao expeiece a iceae i he ik o become TU, i a eady iceae i employme fo yea o come. Thee effec eveally die o, b he aalyi idicae ha i ake a vey log ime. The effec migh be eve moe evee if he ecoomy ffe eveal iceae i he TU ik de o echological advace ha iceae he mimach i he labo make. Tig ow o he effec of a iceae i he degee of akig oe migh expec he ocome o be imila; a baial iceae i TU ad malle effec o TU. Fige how he adjme afe a iceae of fom 50 o 75 pe ce. I i ieeig o look a he effec of a iceae i o he mbe of woke ha have bee moh employed fo le ha oe yea. Uig eaio (8 give < =0.0; i.e. a ligh iceae. Remembe ha hoe woke, i he model, ca be boh TU ad TU eve hogh mo ae TU. A iceae i ha hee effec; he advaage o be TU iceae, moe woke fall io TU ad fewe job ae available.

25 Fige The effec of a 50 pe ce iceae i. 0 Uemployme 8 6 TU TU TUTU Moh Fige how ha he effec fom moe akig eally ae imila o hoe i Fige. The iiio behid hi el i ha ad i ome ee ae bie; moe dicimiaio agai he TU wih he ame iflow o a bigge iflow ad he ame amo of dicimiaio ae omewha imila i hei effec. Howeve, wo diffeece ae woh oig. Fi, if iceae hi el i a ealy chaged TU wheea a iceae i lead o a deceae i TU. ecod, he effec o TU appea o be mch oge fom akig. Fially, le o he coeece of a iceae i he degee of wage pee. Fige 5 how wha happe afe ch a chage. Aohe diffeece i he coeece fo he mbe of woke ha have bee employed fo le moh ha oe yea. Hee, we ge < =0.00; i.e. a ligh deceae. Remembe ha hi ock coai boh TU ad TU woke. Moe akig ha hee effec; he advaage o be TU iceae, he diadvaage o be TU iceae ad hee ae fewe job i he ecoomy.

26 Fige 5 The effec of a 50 pe ce iceae i Ω. 0 8 Uemployme 6 TU TU TUTU Moh Recall he eady ae aalyi whee i wa how ha moe wage pee el i a iceae i boh ock of employed woke. Tha el i cofimed i Fige 5. 5 Howeve, oe ha he TU iceae occ dig he fi yea wheea he TU iceae i mch moe baial ad daw o. To mmaize hee expeime i i obvio ha he mechaim aalyzed i hi pape ca have og effec o he employme level. Qie modeae chage i he paamee ca lead o a pologed peiod of adjme o a ew eilibim ha eail a baial chage i he employme level. I hold alo be oed ha i i ie poible ha eal wold labo make have ffeed pemae hock ha ae a combiaio of he hee ype aalyzed i hi ecio. A ieeig eio i whehe hee expeime ca help o dead he ie i Eopea employme. 6 Dig he la decade boh ho- ad logem employme have iceaed eve hogh he iceae ha bee paiclaly big i log-em employme. Thi mea ha he elaive icidece of log-em employme ha iceaed baially ove ime. 7 Fom Fige ad i i clea 5 The coeece fo he mbe of woke who have bee employed fo le ha oe yea i ow moh a baial iceae; < =0.07. Moe wage pee el i fewe job i he ecoomy. Ove ime hogh he effec become coceaed o he ock of woke who have bee employed fo oe yea o moe. 6 I hold be oed ha TU ad TU i he model ae o ideical o ho ad log em employme i he daa (ee he dicio i ecio II. 7 Fo example, i Gemay he icidece of log-em employme iceaed fom aod 0 pe ce 979 o almo 50 pe ce i he mid 80 (OECD 99.

27 ha akig ad kill lo aloe cao explai wha ha happeed ice boh ho ad log em employme have iceaed. Fom Fige 5 we ee ha wage pee affec boh TU ad TU. Howeve, i i impoible o diigih bewee diffee combiaio of faco i a pely heoeical aalyi. Wha i eeded o flly aalyze hi impoa eio i daa abo he evolio ove ime of he pobabiliy o fid a job a diffee daio ad ch daa ae o eadily available. Fhe empiical eeach i clealy eeded o diigih bewee hypohee. Tempoay hock We may alo aalyze wha he dyamic adjme pah look like afe a empoay hock. e a by aig he diffeece eaio ha deemie he ock of TU ad TU epecively. ieaizig hee eaio ad evalaig hem i eady ae yield he followig wo expeio: =, ( =. ( Coide fi a iceae i TU wih oe pe ce. Accodig o hee eaio hi implie a iceae i TU he ex peiod by 0.8 pe ce a well a a iceae i TU he ex peiod by 0.05 pe ce. The iiio i ha fim ae elca o c wage ice hi wold lead o coly ove. Hece, he employme level e oly lowly o eilibim followig a hock. If TU i oe pece highe hi implie a iceae of TU he ex peiod by moe ha 0.96 pe ce b ha a mall effec o TU he ex peiod. The explaaio i he low employme adjme effec combied wih he limied mbe of job ope o TU woke. Now le look moe cloely a he adjme back o eilibim followig a hock o employme. A a fi expeime le dy he effec of a empoay iceae i he flow fom employme o employme,. 8 Thi expeime ca be 8 Thi iaio i aalyzed wih he ampio ha all age ame he chage i o be pemae. Ohewie he ce of he opimizaio poblem wold have o be chaged o accommodae eveal diffee vale of. 5

28 moivaed by he fac ha a eceio eem o be a faily ho peiod of high job decio ad he model eivale of hi i a iceae i. To be cocee le ame ha doble fo ix peiod ad he e o he oigial level. Fige 6 how how he wo ock of employed woke ae affeced by ch a hock. Fige 6 Adjme back o eilibim afe a 6 moh hock o TU UNemployme 5 TU TU TUTU Moh Fige 6 eveal eveal ieeig fac. Fi, TU iceae dig he peiod wih a big iflow b he e faily ickly o i eady ae vale. Thi i hadly piig ice employe peceive hee woke o be eivale o hei pee employee i all job. Meawhile, TU iiially iceae lowly b iead coie o iceae eveal peiod afe he hock ad he oly vey lowly adj back o i eady ae vale. Thi i he el of wo foce; a bigge ock of TU woke implie a lage iflow io TU fo a mbe of peiod ad, i addiio, employe o a lage exe efe o hie TU woke, ice hey ae peceived a moe coly o hie ha ohe applica. Toal employme fall dig he whole peiod afe he hock b de o he leghy adjme pah of TU i ake ome ime fo oal employme o e o i pe-hock vale; i.e. employme how peiece (afe moh aod 0 pe ce of he hock emai. Oe migh expec moe peie effec fom a hock ha la loge ice, i ch a iaio, moe woke wold fall io TU. Fige 7 how wha happe if he ecoomy ffe a hock laig wo yea. 6

29 Fige 7 Adjme back o eilibim afe a moh hock o TU. 0 8 Uemployme 6 TU TU TUTU Moh ice he hock la loge a lage mbe of woke fall io TU ad hi el i a moe daw o adjme back o eilibim ha i he pevio expeime (afe moh aod 50 pe ce of he hock emai. imila el ae obaied if we le he hock la fo ix moh, a i Fige 6, b alo le he ik o become TU be wice a lage. Thi wold coepod o a hock ha ivolve moe job decio a well a a iceaed mimach i he labo make. ch a hock el i dyamic maily ivolvig TU ad, a expeced, he ocome i a moe daw o adjme poce. The coclio fom hi ecio i ha he model implie peiece b ha he degee of peiece deped o he ae of he hock. A hock ha ivolve a bigge iflow io employme fo oly a ho peiod el i ome peiece. A moe pologed hock o hi iflow o a ho hock ha affec boh he iflow ad he pobabiliy o become TU el i moe peiece. Eeially, he key o geig a baial amo of peiece i ha he hock implie a baial iceae i TU ad o j TU. Depedig o he daio ad ype of he hock he model geeae yealy peiece ae of 0-60 pece. I hold be oed hogh ha he model cao geeae he ea i oo peiece fod i empiical die of oal employme ime eie. 9 A he ame ime i hold be emembeed 9 Empiical eimae of he eial coelaio of employme eie fo Gemay ofe fid peiece aod 90 pe ce (ee fo example Blachad ad mme (986. 7

30 ha he model abac fom eveal faco ha pobably alo add o peiece ch a wage coac paig eveal peiod ad ovelappig wage coac. IV Coclio Thi pape iveigae he coeece of kill lo a a el of employme. Uemployed woke ik loig ome of hei hma capial evey peiod ad fim, who ae able o diffeeiae wage accodig o podciviy/aiig co diffeece, paly avoid hiig woke who have lo hma capial. Fim e a wage above he make-cleaig wage o peve coly ove. The pape he aalyze how ch a ecoomy epod o boh empoay ad pemae hock. I i how ha boh a iceaed ik of loig hma capial, a iceaed degee of akig o moe wage pee el i highe eady ae employme wih he effec beig coceaed o he ock of TU woke. Moeove, he egaive employme effec of boh kill lo ad wage pee iceae whe combied wih akig. I i alo how ha pemae chage i hee key faco geeae leghy adjme phae ivolvig baial effec o he employme level. The meical aalyi idicae ha i ake eveal yea fo he ecoomy o each he ew eady ae level eve whe he paamee chage i ie modeae. I i alo how ha empoay hock have peie effec o employme. The amo of peiece deped o he ype ad daio of he hock b he model i o capable of podcig he ea i oo eial coelaio fod i empiical die. I hold be emembeed, hogh, ha we ae abacig fom eveal faco ha migh add peiece ch a wage coac ha pa eveal peiod ad ovelappig coac. Aohe way o ge moe peiece i o allow fo dicimiaio agai all employed woke a i Eiko ad Gofie (000. Wha coclio ca be daw fom hi dy abo he high ad peie Eopea employme ae? The mai coibio of hi pape i he demoaio ha if ove coideaio, kill lo a a el of employme, ad iabiliy o diffeeiae wage ae impoa feae of eal wold ecoomie hi will affec how he ecoomie epod o boh pemae ad empoay hock, elig i leghy adjme phae ivolvig baial effec o he employme ae. 8

31 Refeece Acemogl, Dao, Pblic Policy i a Model of og-em Uemployme, Ecoomica, 6 (995, Agell, Joa, ad Pe dbog, vey Evidece o Wage Rigidiy ad Uemployme: wede i he 990, Wokig Pape 999:, Uppala Uiveiy, 999. Akelof, Geoge A., Adew K. Roe, ad Jae. Yelle, Job wichig ad Job aifacio i he U.. abo Make, Bookig Pape o Ecoomic Aciviy, (988, Akelof, Geoge A., ad Jae. Yelle, The Fai Wage-Effo Hypohei ad Uemployme, Qaely Joal of Ecoomic, 05 (990, Akio, Joh, eley Gile, ad Nigel Meage, Employe, Recime ad he Uemployed, Iie fo Employme die Repo 5, Bigho, 996. Behez, a, ad ea Delade, Abegivaa Rekyeigbeeede E Ievjdeökig, i OU 996: Akiv Abemakadpoliik: Expebilaga, Expebilaga ill beäkade få Abemakadpoliika kommié, ockholm, 996. Bewley, Tma F., Why Wage Do fall dig a Receio, Havad Uiveiy Pe, Cambidge, 999. Blachad, Olivie J., ad Pee Diamod, The Cyclical Behavio of he Go Flow of U.. Woke, Bookig Pape o Ecoomic Aciviy, (990, Blachad, Olivie J., ad Pee Diamod, Rakig, Uemployme Daio ad Wage, Review of Ecoomic die, 6 (99, 7-. Blachad, Olivie J., ad awece H. mme, Hyeei ad he Eopea Uemployme Poblem, I: NBER Macoecoomic Aal,, MIT Pe, Cambidge, MA, 986. Bla, David M., ad Philip K. Robi, Job each Ocome fo he Employed ad Uemployed, Joal of Poliical Ecoomy, 98 (990, Blide, Ala., ad Do H. Choi, A hed of Evidece o Theoie of Wage ickie, The Qaely Joal of Ecoomic, 05 (990, Boei, Tio, Efoceme of Employme eciy Reglaio, O-he-job each ad Uemployme Daio, Eopea Ecoomic Review, (999,

32 Bda, Michael, ad Chale Wyploz, Go Woke ad Job Flow i Eope, Eopea Ecoomic Review, 8 (99, Cambell III, Cal M., ad Kal. Kamlai, The Reao fo Wage Rigidiy: Evidece fom a vey of Fim, Qaely Joal of Ecoomic, 0 (997, Eiko, efa, ad Nil Gofie, Rakig of Job Applica, O-he-job each ad Peie Uemployme, Wokig Pape 000:8, Office of abo Make Policy Evalaio, Uppala, 000. Gofie, Nil, ad Adea Weemak, Nomial Wage Coac ad he Peie Effec of Moeay Policy, Eopea Ecoomic Review, (998, 07-. H, Jeife, The Effec of Uemployme Compeaio o Uemployme i Daio i Gemay, Joal of abo Ecoomic, (995, Jackma, Richad, ad Richad ayad, Doe og-em Uemployme Redce a Peo Chace of a Job? A Time-eie Te, Ecoomica, 58 (990, Kligvall, Ma, Abegivaa Aiyde, Ua 998:9, Abemakadyele, ola, 998. ayad, Richad, ephe Nickell, ad Richad Jackma, Uemployme - Macoecoomic Pefomace ad he abo Make, Oxfod Uiveiy Pe, Oxfod, 99. jgvi, a, ad Thoma J. age, The Eopea Uemployme Dilemma, Joal of Poliical Ecoomy, 06 (998, ockwood, Be, Ifomaio Exealiie i he abo make ad he Daio of Uemployme, Review of Ecoomic die 58 (99, Machi, ephe, ad Ala Maig, The Cae ad Coeece of og-em Uemployme i Eope, i O. Ahefele ad D. Cad, ed., Hadbook of abo Ecoomic, Volme, Elevie, 999. OECD, Employme Olook, OECD, Pai, 99. Piaide, Chiophe A., o of kill dig Uemployme ad he Peiece of Employme hock, Qaely Joal of Ecoomic, 07 (99, 7-9. Piaide, Chiophe A., ad Joaha Wadwoh, O-he-job each - ome Empiical Evidece fom Biai, Eopea Ecoomic Review, 8 (99,

33 Appedix : Deivaio of eleced Expeio Combiig eaio (5 ad (7 he employme eaio i ( ca be wie a: ( ( ( ( ( ( ( ( ( ( ( ( ( ( (( ( ( ( ( ( ( ( ( ( ( Ω Ω Ω Ω = (A Diffeeiaio of eaio (A wih epec o ad epecively yield he followig expeio (le N deoe he meao ad D he deomiao i (A: = Ω Ω Ω Ω Ω Ω Ω Ω Ω Ω Ω Ω = Ω Ω = Ω Ω Ω = ] ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ][ ( [ ]] ( ( (( ( ( ][( ( ( ( [[ ]] [ ] ( ( ( ( ( ( ( ( ( ( ( [-( [D] ]] ( ( ( [ ( [[ D N D D N D

34 0 ] ( ( ( ( ( ( ( ( ( ( ( ( ][ ( [ < Ω Ω Ω Ω = D (A 0 if 0 ] ( ( ( ( ( ( ( ][- [ ] ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ( ][ [ ] ][ ( ( ( ( ( ( ( ( [ ] ][ ( ( ( [ > < Ω Ω Ω = Ω Ω Ω Ω Ω Ω Ω Ω Ω Ω Ω Ω Ω Ω Ω = Ω Ω = D D N D D (A

35 Appedix : Daa Hee, he daa ed i he calibaio i peeed biefly. Fi, we eed o coide ome cocepal eio ad he go hogh he daa i deail. I a eal wold labo make hee exi a lea hee diic ae; employed, oe o moe gop of employed ad o-of-he labo foce (OF. I hi pape he la gop i lef o o keep he model maageable ad o foc aeio o he ceal mechaim. I a moe complee model of acal labo make OF foce dyamic hold be iclded. The exclio of hi ock ca paially be jified by agig ha hee flow meely epee he exchage of woke; i.e. woke beig eied ad beig eplaced by woke diecly fom chool, pae akig child leave ec. I addiio, Blachad ad Diamod (990 poi o ha he e flow o ad fom he labo foce vaie le ha ohe flow ove he bie cycle. Thi add a bi of complicaio o he calibaio ice labo make daa iclde hi ock wih flow o ad fom i. I hi pape all flow fom ad o OF ae igoed. A aleady meioed Gema labo make daa fo he peiod of he mideighie ae ed. Hee follow a decipio of he daa ed. Facio of employed eeig employme (. ayad, Nickell ad Jackma (99, ig OECD daa, epo a mohly iflow ae of 0. pe ce of employme. Thi fige i obaied by akig he mbe of employed wih daio of le ha oe moh. Thi exclde oghly half of hoe whoe compleed pell i le ha oe moh. To ake acco of hi he fac he lighly highe vale 0.5 pe ce i ed i he calibaio. Facio of employed job-o-job wiche ( E E x. Hee wo poible oce of daa have bee fod. Bda ad Wyploz (99 epo ha i pe ce of hoe employed jmp fom job-o-job while Boei (999 epo ha he fige i 99 i 0.7 pe ce. Hee we ame ha half of hoe hied ae employed ad e he fige 0.5 pe ce i he calibaio. Employme (. ayad, Nickell ad Jackma (99 epo employme ae fom OECD oce. The aveage employme ae fo he peiod i 6.6 pe ce.

36 moh Uemployed le ha oe yea ( <. OECD (99 epo ha 986 aod 9 pe ce of hoe beig employed had bee o fo welve moh o moe. Pobabiliy o emai employed fo afe,, 6, 9 ad moh ( z y. H (995 epo daa fom he pblic e veio of he hoehold-baed GOEP. Uig daa fo he ime peiod he calclae Kapla-Meie vival cve. Fom hee fige i i clea ha aod 90 pe ce emai employed oe moh afe becomig employed. Fhemoe, 70, 5, ad 6 pe ce emai employed afe hee, ix, ie ad welve moh epecively. The lae fige ae obaied by calclaig ecape oly o employme while keepig ecape o OF ecoded a ceoed. ice he model doe o coai OF dyamic i i ha fige ha i eleva hee. The oflow ae fom employme ( U E x. OECD (99 epo eimae of 7.6 pe ce mohly fo he yea 989. I hold be emembeed hogh ha hi fige iclde all flow fom employme ad heefoe hold be ed wih caio. Facio eachig-o he-job (. ayad, Nickell ad Jackma (99, which epo daa fo he UK fom he abo Foce dy, ay ha aod five pe ce of hoe beig employed do o-he-job each. ice hi i he oly eimae available i a lea give a ogh gide a o wha vale ha ca be coideed eaoable.

37 Appedix : Calibaio The objecive of he calibaio i o fid a e of vale fo he obevable magide, { Ω,,,, a, }, ha aify he followig eaio yem: = Ω( a, (A x E E = a, (A5 ( ( ( ( ( ( ( a = ( ( (( ( ( ( ( ( (, (A6 = ( a( (, (A7 y moh ( ( a( = ( ( a (, (A8 ( ( y moh = ( ( a k= 0 ( k ( a k ( ( a( ( ( ( k, (A9 E E moh moh wih he obevable magide, {,, x, y, y }, e eal o hei eady ae vale give i Table. Eeially, he eaio yem i (A-(A9 cold be olved diecly. Howeve, de o he complexiy of hi yem a ieaive mehod i ed. The algoihm ed ca be decibed by he followig fo ep. A vale i e fo he vaiable. The yem i (A-(A8 i olved fo {,,, a, } Ω. The vale of (A9 i calclaed. A ew vale of i choe il covegece i achieved, i.e. (A9 i aified. 5