Title: "State Dependence in Labor Market Fluctuations: Evidence, Theory, and Policy Implications"
Authors: Carlo Pizzinelli (University of Oxford), Konstantinos Theodoridis (Cardiff Business School), Francesco Zanetti (University of Oxford)
Abstract
This paper documents state dependence in labor market fluctuations. Using a Threshold
Vector-Autoregression model, we establish that the unemployment rate, the job separation rate and the job ending rate exhibit a larger response to productivity shocks during periods with low aggregate productivity. A Diamond-Mortensen-Pissarides model with endogenous job separation and on-the-job search replicates these empirical regularities well. The transition rates into and out of employment embed state dependence through the interaction of reservation productivity levels and the distribution of match-speci c idiosyncratic productivity. State dependence implies that the effect of labor market reforms is different across phases of the business cycle. A permanent removal of layoff taxes is welfare enhancing in the long run, but it involves distinct short-run costs depending on the initial state of the economy. The welfare gain of a tax removal implemented in a low-productivity state is 4.9 percent larger than the same reform enacted in a state with high aggregate productivity.