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Heterogeneity in Labor Mobility and Unemployment Flows across Countries

McConnell Seminar in Applied Economics 2020-2021

Organizers : Michael Huberman (U. of Montreal) and Baris Kaymak (U. of Montreal)

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Résumé : There are dramatic cross-country differences in unemployment flows, along with substantial within-country heterogeneity in worker mobility. This paper studies the sources of the cross-country variation in aggregate unemployment outcomes in an environment with search frictions and heterogeneity in labor mobility. The introduction of stochastic matching in a search model with endogenous separations significantly amplifies the impact of firing costs on unemployment inflows and outflows. Calibrating the model to be consistent with the job-tenure separation profile of workers in the U.S. labor market implies a large elasticity of unemployment flows with respect to firing costs—which is in sharp contrast to the modest impact in a model with uniform reallocation probabilities. I build a life-cycle search model calibrated to the U.S. labor market. Plausible variations in institutions (firing costs, unemployment benefits, and taxes) account for a significant fraction of the differences in worker mobility between the U.S. and the French labor market at a disaggregated level. This model implies that modest changes in match-output taxes lead to large differences in unemployment outflows, whereas firing costs reduce the unemployment rate.

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