1994 JobCreationandJobDestructionint

• (Mortensen & Pissarides, 1994) ⇒ Dale T Mortensen, and Christopher A Pissarides. (1994). “Job Creation and Job Destruction in the Theory of Unemployment.” Oxford University Press. doi:10.2307/2297896

Subject Headings: Job Creation; Job Destruction; Creative Destruction.

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Abstract

In this paper we model a job-specific shock process in the matching model of unemployment with non-cooperative wage behaviour. We obtain endogenous job creation and job destruction processes and study their properties. We show that an aggregate shock induces negative correlation between job creation and job destruction whereas a dispersion shock induces positive correlation. The job destruction process is shown to have more volatile dynamics than the job creation process. In simulations we show that an aggregate shock process proxies reasonably well the cyclical behaviour of job creation and job destruction in the United States.

1. INTRODUCTION

Recent microeconomic evidence from the U.S. and other countries has shown that large job creation and job destruction flows co-exist at all phases of the business cycle. Individual establishments have diverse employment experiences even within narrowly defined sectors and regardless of the state of aggregate conditions. In this paper we develop a model of endogenous job creation and job destruction and incorporate it into the matching approach to equilibrium unemployment and wage determination. In our model, establishments have diverse experiences because of persistent idiosyncratic shocks. We examine the implications of the model for the processes of job creation and job destruction and for the aggregate behaviour of unemployment and job vacancies.

The economy we examine has a continuum of jobs that differ with respect to values of labour product. Each job is designed to produce a single unit of a variation on a common product. Each variation is unique to the job and commands a relative price that is subject to idiosyncratic risk, due to either taste or productivity shocks. A key assumption is that investment is irreversible, so an existing job cannot switch the variation of its product once the job has been created. But before creation, technology is fully flexible and the firm can choose the variation of its product. We model the idiosyncratic risk for existing jobs as a jump process characterized by a Poisson arrival frequency and a drawing from a common distribution of relative prices. Large negative shocks induce job destruction but the choice of when to destroy the job is the firm's.

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	Author	volume	Date Value	title	type	journal	titleUrl	doi	note	year
1994 JobCreationandJobDestructionint	Dale T Mortensen Christopher A Pissarides			Job Creation and Job Destruction in the Theory of Unemployment						1994