On Non-linearities in Unemployment

Frédéric Karamé - Professeur d'Economie à le Mans université.

Abstract: Based on an econometric estimation, this study demonstrates that non-linearities, coupled with worker heterogeneity, make it possible to reconcile the Diamond-Mortensen-Pissarides model with the labor market dynamics observed in the United States. Non-linearities, induced by firms' exits, firing costs, and a binding minimum wage, magnify volatilities, whereas heterogeneity concentrates the effects of large fluctuations on low-paid workers, supporting the downward rigidity induced by the minimum wage. The model not only explains the job finding, job separation, and unemployment rates well but also explains the dynamics of the Beveridge curve, as well as the involuntary component of separations and dynamics. Moreover, the model accounts for a large portion of the wage and annual earnings inequalities and their movements observed over the business cycle without using any information on observable heterogeneity during the estimation procedure. In addition to being able to explain unemployment and wages over the business cycle (short-term elasticity), the model also matches the average impact of a permanent minimum wage increase (long-run elasticity) to employment and wage inequalities, highlighting that this policy evaluation depends on the business cycle episode.

Stéphane Adjemian, GAINS-TEPP (FR CNRS 3435) et IRA (Le Mans Université)
Frédéric Karamé, GAINS-TEPP (FR CNRS 3435), IRA (Le Mans Université) et CEPREMAP
François Langot, GAINS-TEPP (FR CNRS 3435), IRA (Le Mans Université), CEPREMAP, Paris School of Economics et Institut Universitaire de France.