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Title: On nonlinearities in unemployment Authors:  Frederic Karame - Le Mans University (France)
Francois Langot - Le Mans University (France) [presenting]
Stephane Adjemian - Le Mans University (France)
Frederic Karame - Le Mans University (France)
Abstract: An extended version of the Diamond-Mortensen-Pissarides model is proposed to explain the nonlinearities of the US labor market. We take into account occasionally binding constraints and integrate worker heterogeneity, endogenous firing costs and a minimum wage. Four regimes can be distinguished: in the first, it is optimal to hire; in the second it is optimal to do nothing; in the third it is optimal to fire workers; and the last one it is optimal to close the firm. Aggregate dynamics combine heterogeneous reactions, specific to each labor market segmented by the ability types. Combining global methods to solve the model and particle filtering to estimate the structural parameters, take advantage of the information on nonlinearities that are contained in the data. We show that it provides a very good fit of the three time series of interest, the job finding, the job separation and the unemployment rates. The estimation shows that the firing costs are insignificant. These extensions of the basic DMP model allow us to investigate the cyclical behaviors of the vacancy rate and of the wage distribution, as well as the impact of a minimum wage increase conditionally to a business cycle episode.