Economics seminar: Understanding employment dynamics

Event Date: 25 March 2015

What are the microeconomic foundations of aggregate employment dynamics? Canonical models of the aggregate labour market—such as models of lumpy adjustment, or of search frictions—share a common theme in exploring the aggregate implications of microeconomic adjustment frictions. We present an empirical diagnostic that informs the role of this general class of frictions in shaping aggregate employment dynamics.

 Application of this diagnostic to rich establishment micro data for the United States suggests that canonical models can explain little of observed employment dynamics. Further exploration of these micro data suggests instead the importance of replacement hiring whereby firms go to particular lengths to refill positions vacated by quits. A prototype model suggests that replacement hiring has the potential to generate both amplification and propagation of vacancy and unemployment fluctuations.

Published: 29 September 2015