nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

the demand for borrowed reserves a switching regression model a microeconomic model of bank demand for borrowed reserves from the federal reserve is developed based upon constrained cost minimization the derived demand function was found to correspond to behavior appropriate to the unknown switchpoint switching regression problem when estimated parameters generally conformed to theoretical expectations the model was also tested for existence of switching regression behavior against a model similar to goldfeld and kane 12 significance exceeded 99 in all cases with the advent of reserve intermediate targeting it appears especially necessary to reinvestigate the behavior determining this important source of reserves with the advent of reserve intermediate targeting as of october 6 1979 it appears especially necessary to reinvestigate the behavior determining one source of these reserves borrowings from the discount window although the behavior of borrowed reserves has concerned researchers since the 1920s interest in the subject generally waned after 1970 the reason has much to do with the studies of polakoff 21 and goldfeld and kane 12 polakoff develops a structural model for discount window borrowing based upon the individual bank minimizing its costs among alternative borrowing sources adapting the seminal work of turner 29 goldfeld and kane extend and estimate polakoff s original model because of their well developed microeconomic theory seemingly accurate empirical adjustments and proxy variables and excellent all around empirical results goldfeld and kane s study is widely hailed as a leading study in the field of borrowed reserve demand evidence exists through studies such as keir 18 that the federal reserve continues to use this same basic model in this study a borrowed reserve demand function is derived using a constrained minimum cost setup included in the cost of discount window borrowing is an implicit cost function reflecting bank reluctance to borrow from the discount window caused by federal reserve surveillance the derived demand function found in section i conforms to behavior appropriate to a switching regression model in this case switching occurs dependent upon the size of the interest rate spread relative to an unknown switchpoint after making minor adjustments in section ii the model is estimated employing monthly data from 1955 78 these results and the tests for the existence of

models of currency crises with self fulfilling features the discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency market equilibria after describing an illustrative model in which high unemployment may cause an exchange rate crisis with self fulfilling features the paper reviews some other self reinforcing mechanisms recent econometric evidence seems consistent with the practical importance of these mechanisms

uncertainty and the specificity of human capital this paper studies the choice between general and specific human capital a trade off arises because general human capital while less productive can easily be reallocated across firms accordingly the fraction of individuals with specific human capital depends on the amount of uncertainty in the economy our model implies that while economies with more specific human capital tend to be more productive they also tend to be more vulnerable to turbulence as such our theory sheds some light on the experience of japan where human capital is notoriously specific while japan benefited from this predominately specific labor force in tranquil times this specificity may also have been at the heart of its prolonged stagnation

how do experienced traders respond to inflows of inexperienced traders an experimental analysis we conducted asset market experiments where one experienced subject interacts with five inexperienced subjects to investigate how experienced subjects change their price forecasts and trading behavior when faced with strategic uncertainty caused by inflows of inexperienced subjects only half the experienced subjects initially forecasted prices deviating more from the fundamental values in the market with five inexperienced subjects than in the final round of the experiment in which they had previously participated furthermore the majority of our experienced subjects did not change their trading behavior many experienced subjects act as price stabilizers when the inflow of inexperienced subjects is not associated with other changes in market conditions

financial factors in the great depression eginning with irving fisher 1933 and john maynard keynes 1931 b 1963 macroeconomists have argued that financial markets were important sources and propagators of decline during the great depression turning points during the depression often coincided with or were preceded by dramatic events in financial markets stock market collapse waves of bankruptcy and bank failure and contractions in the money stock but the mechanism through which financial factors contributed to the depression has been a source of controversy as has been the relative importance of financial factors in explaining the origins and persistence of the depression this essay reviews the literature on the role of financial factors in the depression and draws some lessons that have more general relevance for the study of the depression and for macroeconomics i argue that much of the recent progress that has been made in understanding some of the most important and puzzling aspects of financial real links in the depression followed a paradigm shift in economics a central neglected theoretical piece of the story for financial factors was the allocative effects of imperfections in capital markets which can imply links between disruptions in financial markets and subsequent economic activity also the increasing emphasis on learning and path dependence in economics has helped to explain why financial shocks during the 1930s were so severe and why policy makers failed to prevent the depression

reputation versus social learning a folk theorem of game theory illustrates that strategic use of reputation can drastically alter the equilibrium play of an isolated group of n players engaged in a finitely repeated game we show that this folk theorem may fail in social settings where many groups of n players play the game sequentially the ability to strategically use reputation dies out over time due to players opportunity to observe the play of earlier groups this phenomenon is demonstrated in a model of bayesian recurring games by using old and new techniques from the rational learning literature combined with a notion of purification journal of economic literature classification numbers c72 c73 d83

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

the excess sensitivity of layoffs and quits to demand excessive layoffs in bad times and excessive quits in good times both stem from the same weakness in practical employment arrangements the specific nature of worker firm relations creates a situat

bargaining and reputation the paper develops a reputation based theory of bargaining the idea is to investigate and highlight the influence of bargaining postures on bargaining outcomes a complete information bargaining model a la rubinstein is amended to accommodate irrational types who are obstinate and indeed for tractability assumed to be completely inflexible in their offers and demands a strong independence of procedures result is derived after initial postures have been adopted the bargaining outcome is independent of the fine details of the bargaining protocol so long as both players have the opportunity to make offers frequently the latter analysis yields a unique continuous time limit with a war of attrition structure in the continuous time game equilibrium is unique and entails delay consequently inefficiency the equilibrium outcome reflects the combined influence of the rates of time preference of the players and the ex ante probabilities of different irrational types as the probability of irrationality goes to zero delay and inefficiency disappear furthermore if there is a rich set of types for both agents the limit equilibrium payoffs are inversely proportional to their rates of time preference

transitions in the german labor market structure and crisis abstract since the so called hartz iv reforms around 2005 and during the global crisis of 2008 2009 the german labor market featured mainly declining unemployment rates we develop a search and matching model with heterogeneous skills to explore the role of structural and cyclical policies for this performance calibrating unemployment benefits to approximate legislation before and after the reforms we find a large reduction in unemployment and its duration with the transition concluding after about three years during the crisis the extended use of short time labor subsidies that prevent jobs from being destroyed is likely to have prevented strong increases in unemployment

understanding unemployment flows this article reviews the current state of research on unemployment dynamics in macroeconomic models in particular it discusses the increasingly widespread use of the labour market flow approach as implemented via a search and matching process and presents main policy considerations that arise from this approach related to unemployment benefit systems and employment protection it reviews the implications of the labour flow approach for dynamic properties of macroeconomic models and discusses policy implications for macroeconomic and labour market policies finally it presents new evidence on the effectiveness of policies to influence unemployment in and outflows copyright 2011 oxford university press

technology policy interaction in frictional labour markets does capital embodied technological change play an important role in shaping labour market outcomes to address this question we develop a model with vintage capital and search matching frictions where irreversible investment in new vintages of capital creates heterogeneity in productivity among firms matched as well as vacant we demonstrate that capital embodied technological change reduces labour demand and raises equilibrium unemployment and unemployment durations in addition the presence of labour market regulations unemployment benefits payroll taxes and firing costs exacerbates these effects thus the model is qualitatively consistent with some key features of the european labour market experience relative to that of the u s it features a sharper rise in unemployment and a sharper fall in the vacancy rate and the labour share a calibrated version of our model suggests that this technology policy interaction could explain a sizeable fraction of the observed differences between the u s and europe copyright 2007 wiley blackwell

learning from others a welfare analysis abstract this paper considers a smooth and noisy version of the statistical prediction model studied in the herding informational cascades literature and compares market and optimal learning the latter is characterized by defining a decentralized welfare benchmark as the solution to an infinite horizon team problem market behavior involves herding in the sense that agents put too little weight on their private information for any given precision of public information and yields underinvestment in the production of public information however both market and optimal learning involve slow learning examples of the model include learning by doing reaching consensus and consumer learning about quality journal of economic literature classification numbers d82 d83

search unemployment and age abstract we examine a search and matching model of the labor market with overlapping generations of workers in this model we focus on the effects of the finite lifetime of workers as a result of finite lifetime very old workers with the same productivity as younger workers generally earn less a market solution with nash bargained wages is never optimal as old workers search too long compared to the efficient solution we also examine the effects of policy measures such as hiring subsidies or unemployment insurance on employment labor market institutions have a differential impact for different age groups

do people play nash equilibrium lessons from evolutionary game theory evolutionary game theory provides an answer to two of the central questions in economic modeling when is it reasonable to assume that people are rational and when is it reasonable to assume that behavior is part of a nash equilibrium and if it is reasonable which equilibrium the traditional answers are not compelling and much of evolutionary modeling is motivated by the need for a better answer evolutionary game theory suggests that in a range of settings agents do eventually play a nash equilibrium moreover evolutionary modeling has shed light on the relative plausibility of different nash equilibria

the role of shocks and institutions in the rise of european unemployment the aggregate evidence two key facts about european unemployment must be explained the rise in unemployment since the 1960s and the heterogeneity of individual country experiences while adverse shocks can potentially explain much of the rise in unemployment there is insufficient heterogeneity in these shocks to explain cross country differences alternatively while explanations focusing on labour market institutions explain current heterogeneity well many of these institutions pre date the rise in unemployment based on a panel of institutions and shocks for 20 oecd nations since 1960 we find that the interaction between shocks and institutions is crucial to explaining both stylised facts

technological learning and labor market dynamics the search and matching model of the labor market fails to match two important business cycle facts i a high volatility of unemployment relative to that of labor productivity and ii a mild correlation between these two variables we address these shortcomings by focusing on the implementation process of technological innovation that is the empirical nding that new technologies are subject to a learning process we consider a novel source of business cycles namely uctuations in the ease or speed of technological learning and show that a search and matching model featuring such shocks can account for both facts moreover our model provides a new interpretation of news shocks discussed in the recent business cycle literature

earnings losses and labor mobility over the life cycle an extensive empirical literature has documented that workers with high tenure suffer large and persistent earnings losses when they get displaced we study the reasons behind these losses in a tractable search model with a life cycle dimension endogenous job mobility worker and match heterogeneity the model reconciles key characteristics of the u s labor market large average transition rates a large share of stable jobs and the earnings losses from displacement we decompose the earnings losses and find that only 50 result from skill losses endogenous reactions and selection account for the remainder our findings have important implications for the welfare costs of displacement and labor market policy

member bank borrowing and the fed s contractionary monetary policy during the great depression this paper examines the causes of federal reserve policy errors during the great depression it finds compelling evidence that the fed developed a flawed strategy during the 1920s and continued to use that strategy during the depression the fed s strategy relied on the behavior of member bank borrowing and interest rates as policy indicators a detailed empirical examination of borrowed reserve demand reveals the errors in the fed s strategy and helps to explain why the fed did not undertake vigorous countercyclical policy during the depression copyright 1990 by ohio state university press

a theory of quits and layoffs with efficient turnover this paper answers the efficient turnover literature s long silence regarding the quit layoff distinction treating quits as worker initiated separations and layoffs as firm initiated separations i establish that the existence of layoffs is compatible with optimizing workers and firms forming and dissolving employment matches to exploit all the gains from trade the efficient turnover approach is shown to be consistent with many empirical regularities that distinguish quits from layoffs structural implications of the model are tested on data from the psid

european unemployment and turbulence revisited in a matching model we recalibrate den haan haefke and ramey s matching model to incorporate our preferred specie cation of turbulence as causing distinct dynamics of human capital after voluntary and involuntary job losses under our calibration with high unemployment benee ts an increase in turbulence increases the unemployment rate and the duration of unemployment while leaving the ine ow rate into unemployment roughly unchanged mirroring features of european data in the 1980s and 1990s the essential issue is that den haan haefke and ramey specify that in turbulent times workers experiencing layoffs and quits are both subject to instantaneous skill losses while we restrict instantaneous skill losses to laid off workers jel e24 j64

monetary shocks in a model with skill loss unemployment shows persistent and long lasting responses to nominal and real shocks standard real business cycle models with search frictions but a homogeneous labor force are able to generate some volatility and persistence but not enough to match the empirical evidence moreover empirical studies emphasize the importance of the heterogeneity of the unemployment pool to fully understand unemployment dynamics in particular in most european countries the incidence of long term unemployment is large and well known one of the possible causes consequences of long term unemployment is the skill deterioration of the unemployment pool in this paper we introduce the skill loss mechanism and therefore a heterogeneous labor force in a new keynesian framework with search frictions calibrating the model for the spanish economy we show that while the skill loss mechanism helps to explain the magnitude of the response of unemployment to monetary shocks it does not improve the performance of the homogeneous worker model in terms of the persistence of the response especially for short and long term unemployment

unemployment responses to skill biased technology shocks the role of labour market policy do skill biased shocks that increase the spread of labour productivities interacting with different policy regimes explain the rise in unemployment in europe relative to the united states in the 1980s and 1990s the hypothesis is an implication of a version of the mortensen and pissarides 1994 model of equilibrium unemployment which allows for worker heterogeneity a calibrated version of the model implies that a similar unemployment increase would have occurred in the united states over this period given changes in relative productivity by education implied by observed wage changes had unemployment compensation and employment protection policies been at european levels

declining labor turnover and turbulence abstract the rate of job loss has been on a secular decline for the last four decades or longer changes in demographics or industry composition do not account for the trend this paper seeks to identify the possible sources of the decline using a simple search and matching model with two types of workers experienced and inexperienced where the former type faces a risk of skill loss during unemployment the calibrated model suggests that a higher risk of skill loss during unemployment results in a lower job separation rate because workers accept lower wages in exchange for job security various other potential hypotheses are also examined

the federal reserve and panic prevention the roles of financial regulation and lender of last resort this paper surveys the role of the federal reserve within the financial regulatory system with particular attention to the interaction of the fed s role as both a supervisor and a lender of last resort the institutional design of the federal reserve system was aimed at preventing banking panics primarily due to the permanent presence of the discount window this new system was successful at preventing a panic in the early 1920s after which the fed began to discourage the use of the discount window and intentionally create stigma for window borrowing policies that contributed to the panics of the great depression the legislation of the new deal era centralized fed power in the board of governors and over the next 75 years the fed expanded its role as a supervisor of the largest banks nevertheless prior to the recent crisis the fed had large gaps in its authority as a supervisor and as lender of last resort with the latter role weakened further by stigma the fed was unable to prevent the recent crisis during which its lender of last resort function expanded significantly as the fed begins its second century there are still great challenges to fulfilling its original intention of panic prevention

an examination of country member bank cash balances of the 1930s a test of alternative explanations around march 1933 commercial banks began accumulating unprecedented amounts of cash uncertainty over deposits and loans low interest rates relative to brokerage fees and costly de novo capital have been used to explain this behavior this paper employs aggregate call date data for country member banks in the 12 federal reserve districts to formally investigate the role of these factors in the accumulation the results indicate a minimal if any role for these factors the findings suggest that it was the unintended consequence of unprecedented deposit growth in the face of large scale related adjustment costs

turbulence and unemployment in a job matching model 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 jel e24 j64

hope springs eternal learning and the stability of cooperation in short horizon repeated games abstract this paper considers learning rates in finitely repeated prisoners dilemmas if players think their opponents might be relatively cooperative e g tit for tat or grim types they will cooperate in finitely repeated prisoners dilemmas see kreps et al j econom theory 27 1982 245 however if there are actually no cooperative types players will eventually learn this and cooperation will break down this paper shows that this learning is extremely slow so it will take an extremely long time for cooperation to break down thus suppose the world is either good or bad the probability of a grim type is 0 if the world is good and zero if the world is bad successive generations pair up to play finitely repeated prisoners dilemmas players observe play in previous generations and use bayes rule to update their prior that the world is good we show that if the world is really bad then falls o 2 log 1 per generation on average thus if is small there is less cooperation if the world is good but cooperation may become more stable for a representative 19 period repeated prisoners dilemma beliefs fall one percentage point on average after a thousand generations to derive these learning rates we must refine existing results on the sensitivity of repeated games to kreps et al 1982 type perturbations specifically we show cooperation is possible in perturbed prisoners dilemmas repeated o log 1 times this improves significantly on the o 1 results in previous work the paper thus provides two new reasons why cooperation tends to be stable even in short horizon repeated games

behavioral aspects of arbitrageurs in timing games of bubbles and crashes abstract this paper demonstrates the theoretical foundation that underlies the willingness of rational arbitrageurs to delay and reinforce the speculative attack the key assumptions are that there is a small probability that arbitrageurs are behavioral and never time the market of their own accord and it is uncertain whether arbitrageurs are behavioral or rational we model a stock market as a timing game in which arbitrageurs compete to react quickest we show that rational arbitrageurs are willing to ride the bubble for a long period we also characterize symmetric nash equilibria and show the sufficient condition for uniqueness

the growing reluctance to borrow at the discount window an empirical investigation federal reserve regulation a imposes formal guidelines on borrowing from the discount window and ensures that the facility is used for appropriate purposes in a way this regulation imposes a nonprice mechanism that compels depository institutions to be more prudent in exercising their borrowing privileges in the 1980s however banks became increasingly more reluctant to borrow adjustment credit from the discount window this behavior is puzzling because discount window guidelines have not changed this paper investigates the reasons behind the weakened demand for borrowed reserves our empirical findings suggest that the growing reluctance to borrow stems from the deteriorating financial position of banks during this period in particular banks avoided the discount window because they feared that market participants might have interpreted their visits as a signal of serious funding difficulties

the money market meltdown of the great depression consistent with theories of financial frictions this study finds that higher corporate risk premia and flight to quality events contributed to the increased use of a collateralized form of business lending bankers acceptances in real levels and relative to that of noncollateralized commercial paper which plunged during the great depression these short lived instruments are more timely measures of credit availability than are bank business failures and bank loan outstandings these shifts in the composition of external finance were large supporting the view that financial frictions rose and credit availability fell during the great depression

distributional dynamics following a technological revolution in this paper we explore the link between technological change and the dynamics of employment production and the distribution of earnings technological change not only advances society s collective capability but also changes the relative productivities of its members the latter effect establishes the likely winners and losers from advances in productive capabilities provides a mechanism that can generate cyclical fluctuations in output as well as employment and determines the evolution of the earnings distribution dynamique de la repartition a la suite d une revolution technologique ce memoire examine le lien entre le changement technologique et la dynamique de l emploi de la production et de la repartition des revenus le changement technologique n augmente pas seulement la capacite collective d une societe mais modifie aussi les productivites relatives de ses membres ce dernier effet cree des gagnants et des perdants declenche un mecanisme qui peut generer des fluctuations cycliques tant dans le niveau de production que dans celui de l emploi et determine l evolution de la repartition des revenus

does child labour displace schooling evidence on behavioral responses to an enrollment subsidy this brief summarizes the results of a gender impact evaluation study entitled does child labour displace schooling evidence on behavioral responses to an enrollment subsidy conducted between 1995 and 1996 in bangladesh the study observed that the subsidy increases schooling but its effect on child labour is ambiguous the subsidy increased schooling by far more than it reduced child labour substitution effects helped protect current incomes from the higher school attendance induced by the subsidy substitution effects helped protect current incomes from the higher school attendance induced by the subsidy the reduction in the incidence of child labour by boys girls represents about one quarter eighth of the increase in their school enrollment rate

worker flows job flows and unemployment in a matching model abstract standard matching models of unemployment generate far too little volatility in unemployment and vacancies relative to the variation in the shock variables shimer 2005 showed that in us data the vacancy to unemployment ratio is about 26 times more volatile than the standard model predicts he identified the flexibility of wages as the key issue and triggered a heated debate on possible improvements of the core model to accommodate these empirical facts in this paper we first document shimer s facts for the uk and find them to be qualitatively similar to us facts we then develop and calibrate a model based on the mortensen and pissarides approach that increases the volatility of the v u ratio 20 fold compared to the standard framework the key features of our model relate to the job creation decision by firms and the search options of workers we allow these to search whilst employed and firms to re advertise jobs that have been quit from this leads us to use a different job creation process whereby potential vacancies or job ideas arise at a finite rate per period over a range of idiosyncratic productivities calibrating the model to uk data we show that it delivers volatility in unemployment and vacancies much closer to though still not as large as that observed for the uk whilst retaining the standard wage determination process

finite bubbles with short sale constraints and asymmetric information abstract we present a finite period general equilibrium model of an exchange economy with asymmetric information we say that a rational expectations equilibrium exhibits a strong bubble if the price is higher than the dividend with probability one we show that necessary conditions for a strong bubble to occur are that 1 each agent must have private information in the period and state in which the bubble occurs 2 each agent must be short sale constrained at some period in the future with positive probability and 3 agents trades are not common knowledge we present examples of bubbles when the necessary conditions are satisfied journal of economic literature classification numbers c72 d52 d82 d84 g12 g14

technological acceleration skill transferability and the rise in residual inequality this paper provides a quantitative theory for the recent rise in residual wage inequality consistent with the empirical observation that a sizable part of this increase has a transitory nature a feature that eludes standard models based on ex ante heterogeneity in ability an acceleration in the rate of quality improvement of equipment like the one observed from the early 1970s increases the productivity quality differentials across machines jobs in a frictional labor market this force translates into higher wage dispersion even among ex ante equal workers with vintage human capital the acceleration reduces workers capacity to transfer skills from old to new machines generating a rise in the cross sectional variance of skills and therefore of wages through calibration the paper shows that this mechanism can account for 30 percent of the surge in residual inequality in the u s economy or for most of its transitory component two key implications of the theory faster within job wage growth and larger wage losses upon displacement find empirical support in the data

monetary factors in the great depression this paper examines the role of monetary policy in the early stages of the great depression and considers the mechanism whereby this policy may have affected real activity i conclude that the depression was preceded by a dramatic shift towards a highly contractionary monetary policy the economic impact of this policy seems unlikely to have come through the conventional keynesian channels of a shortage of liquidity and high ex ante real interest rates but instead may have operated through unanticipated deflation and after 1930 through the disruption of financial intermediation as a consequence of the banking panics

the role of the federal reserve as lender of last resort and the seasonal fluctuation of interest rates the federal reserve s role as a lender of last resort may explain why the seasonal fluctuation of interest rates appeared to decline around 1914 the creation of the fed reduced the seasonal fluctuation of both the probability of a bank receiving an emergency loan and the probability of a financial panic the seasonality of real interest rates could therefore have declined regardless of whether the fed conducted seasonal open market operations the evidence is consistent with the lender of last resort model copyright 1991 by ohio state university press

technological learning and labor market dynamics learning and labor market dynamics the search and matching model of the labor market fails to match two important business cycle facts i a high volatility of unemployment relative to labor productivity and ii a mild correlation between these two variables we address these shortcomings by focusing on technological learning by doing the notion that it takes workers time using a technology before reaching their full productive potential with it we consider a novel source of business cycles namely fluctuations in the speed of technological learning and show that a search and matching model featuring such shocks can account for both facts moreover our model provides a new interpretation of recently discussed news shocks

cooperation for pennies a note one equilibria abstract it is shown that in finitely repeated smooth games e equilibria are capable of supporting full cooperation up to very near the end of the horizon with very small amounts of irrationality e furthermore behavior even near the end of the horizon is highly insensitive to the amount of irrationality assumed journal of economic literature classification numbers c73 l13

unemployment history and frictional wage dispersion abstract recent evidence shows that baseline search models struggle to match the observed levels of wage dispersion this paper studies a random matching search model with human capital losses during unemployment wage dispersion increases as workers accept lower wages to avoid long unemployment spells the model explains between a third and half of the observed residual wage dispersion when adding on the job search the model accounts for all of the residual wage dispersion and generates substantial dispersion even for high values of non market time the paper thus addresses the trade off between explaining frictional wage dispersion and the cyclical behavior of unemployment