Unemployment and Vacancy Dynamics with Imperfect Financial Markets

30 Pages Posted: 29 Nov 2015

See all articles by Carlos Carrillo-Tudela

Carlos Carrillo-Tudela

University of Leicester; IZA Institute of Labor Economics; University of Essex

Michael Graber

University College London

Klaus Wälde

University of Mainz; CESifo (Center for Economic Studies and Ifo Institute); UCL at Louvain la Neuve

Abstract

This paper proposes a simple general equilibrium model with labour market frictions and an imperfect financial market. The aim of the paper is to analyse the transitional dynamics of unemployment and vacancies when financial constraints are in place. We model the financial sector as a monopolistically competitive banking sector that intermediates financial capital between firms. This structure implies a per period financial resource constraint which has a closed form solution and describes the transition path of unemployment and vacancies to their steady state values. We show that the transition path crucially depends on the degree of wage flexibility. When wages are bargained sequentially the transition path is always downward sloping. This implies unemployment and vacancies adjust in opposite directions as observed in the data. When calibrating the model to the Great Recession and its aftermath we find that the lack of an improvement in the financial sector's effectiveness to intermediate resources played a crucial role in the slow recovery of the labour market.

Keywords: job search, unemployment, financial markets

JEL Classification: J63, J64, G10

Suggested Citation

Carrillo-Tudela, Carlos and Graber, Michael and Wälde, Klaus, Unemployment and Vacancy Dynamics with Imperfect Financial Markets. IZA Discussion Paper No. 9525, Available at SSRN: https://ssrn.com/abstract=2696363

Carlos Carrillo-Tudela (Contact Author)

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Michael Graber

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Klaus Wälde

University of Mainz ( email )

Mainz School of Management and Economics
Mainz, 55128
Germany
+49 6131 3920143 (Phone)

HOME PAGE: http://www.waelde.com

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

UCL at Louvain la Neuve

Place Montesquieu, 3
Louvain-la-Neuve, 1348
Belgium

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
17
Abstract Views
387
PlumX Metrics