Zeitschrift für Forschung und Entwicklung
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The Effect of Job Destruction Shocks in Unemployment Theory

Walid Y Alali*, John Knight

This Paper examines the connection between market density and unemployment, finding that they are not independent of each other. It also highlights some issues with the assumption of unrestricted access to job openings in the DiamondMortensen-Pissarides framework. By taking an open approach and using SMM, it is discovered that the creation of jobs is not infinitely flexible. The restriction of setting the job distribution shock to zero, which is used to create the dynamics of the Beveridge curve, is unnecessary because a recession leads to a decrease in vacancies as unemployment increases. Contrary to popular belief, the calibrated model reveals that the process of dividing labour actually causes fluctuations in unemployment rates throughout the economic cycle.