Job creation and job destruction in the theory of unemployment. The chapter also surveys other reasons given in the literature for the observed levels in unemployment, including mismatch and real interest rates. Under the insider wage model of Mortensen and Pissarides Mortensen, D.T., Pissarides, C.A., 1994. It is argued that on the whole European countries have been more generous in their unemployment support policies and in their employment protection legislation than the USA.
It is also shown that the large differences in unemployment rates observed in industrialized countries can be attributed to a large extent to differences in policy towards employment protection legislation (which increases the duration of unemployment and reduces the flow into unemployment) and the generosity of the welfare state (which reduces job creation). The model is shown to explain well the employment fluctuations observed in the US economy, within the context of a real business cycle model. Steady-state equilibrium is at the point where the two flows are equal.
The outcome is a model for the flow of new jobs and unemployed workers from inactivity to production (the ‘job creation’ flow) and one for the flow of workers from employment to unemployment and of jobs out of the market (the ‘job destruction’ flow). The search and matching model is built on the assumptions of a time-consuming matching technology that determines the rate of job creation given the unmatched number of workers and jobs and on a stochastic arrival of idiosyncratic shocks that determines the rate of job destruction given the wage contract between matched firms and workers. The government keeps unemployment insurance benefits fixed at the amount, while balancing its budget on a period-by-period basis. Second, it applies the model to the study of employment fluctuations and to the explanation of differences in unemployment rates in industrialized countries. The equilibrium interest rate will be a function of the aggregate technology shock and the cross-sectional distribution of agents across states, so that r R ( Z). Review of Eco- Modern unemployment theory has come a nomic Studies, July 1994, 61(3), pp. Concluding Remarks Job Creation and Job Destruction in the Theory of Unemployment. First, it reviews the model of search and matching equilibrium and derives the properties of employment and unemployment equilibrium. Mortensen, Dale and Pissarides, Christopher. Pissarides develops a theory of unemployment which includes as a special.
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