Slow recoveries, worker heterogeneity, and the zero lower bound (2013)
BibTeX
@MISC{Ravenna13slowrecoveries,,
author = {Federico Ravenna and Carl E. Walsh},
title = {Slow recoveries, worker heterogeneity, and the zero lower bound},
year = {2013}
}
Share
 |
 |
 |
 |
||
OpenURL
Abstract
We show that a new Keynesian model with search and matching labor market frictions, worker heterogeneity, and a zero lower bound on the nominal interest rate is able to account qualitatively for several characteristics of the Great Recession and the sluggish recovery of the U.S. job market. With worker heterogeneity, a slow recovery lowers the average productivity of the pool of unemployed workers as less productive workers experience a higher inflow into unemployment and lower outflow from unemployment. This compositional effect lowers the expected surplus for firms of creating new jobs. Compared to a model with homogeneous workers, worker heterogeneity in a persistent downturn results in: (1) a much larger increase in unemployment; (2) a similar output recovery but a delayed and much slower recovery of unemployment (a jobless recovery); (3) little downward wage pressure despite considerable slack in the labor market; (4) a fall in measured match efficiency and a long-lived shift in the Beveridge curve. These results are obtained despite the assumption that wages are fully flexible. We show that the employment consequences of the zero lower bound on the nominal interest rate are small if workers are homogeneous but are large in the presence of worker heterogeneity.
Keyphrases
worker heterogeneity slow recovery nominal interest rate measured match efficiency labor market friction similar output recovery employment consequence new job long-lived shift compositional effect great recession u.s. job market unemployed worker expected surplus sluggish recovery persistent downturn result beveridge curve several characteristic productive worker downward wage pressure new keynesian model considerable slack homogeneous worker labor market average productivity jobless recovery
