MACRO: Equilibrium Job Turnover and the Business Cycle; Professor Carlos Carrillo-Tudela (University of Essex)

Abstract

This paper develops and estimates a new equilibrium theory of unemployment, firm dynamics and on-the job search over the business cycle. We investigate two seemingly unexplored facts. Firm job destruction is negatively correlated with cyclical unemployment and shares a similar cyclical correlation to job creation. We show that these dynamics explain why unemployment is highly persistent and so provide a new perspective on the behaviour of unemployment over the business cycle. Our model is rich enough to match a wide range of firm- and worker-level patterns in the cross-section, yet tractable enough to be estimated over the business cycle. A key success is that our framework jointly replicates the observed aggregate fluctuations in a both worker turnover and firm job flows. We show the importance of job destruction due to unreplaced quits in explaining why job destruction is procyclical and why unemployment is so persistent.

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