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Gross job flows dynamics, defined as the behavior of creation and destruction of jobs at the establishment level, has become a topic of great interest in economics during recent years and researchers have resorted to different empirical methodologies in order to tease out its causes and consequences, as well as its connections to overall economic activity.

In this context, my dissertation attempts to contribute to the debate by advancing the usefulness of frequency-domain techniques. I emphasize not only the relevance of the economic questions being examined, but also the unique perspective that frequency-domain techniques can provide. There are three major questions I pursue. The first is why equilibrium search models of labor market frictions have trouble explaining the observed persistence in employment fluctuations.

Its to implement a frequency-domain decomposition of the employment growth rate to isolate the contributions coming from the job creation spectrum, the job destruction spectrum, and the cross-spectrum between the two. Among other results,it show that the failure to generate a negative contemporaneous correlation between job creation and job destruction at business cycle frequencies is behind the inability of the Mortensen-Pissarides (1994) canonical model to reproduce the empirical spectral shape of the employment growth series.

The second question I tackle relates to the direction of causality between aggregate employment fluctuations and gross job reallocation. Recent macroeconomic models suggest an active role for reallocation dynamics over the business cycle, and my results can be interpreted as supporting evidence that such a role indeed exists, but at a low frequency range. The basic idea is to look for different causality relationships at different time-scales by combining wavelet techniques with a standard Granger causality test.

Employment fluctuations are the result of a complex mix between exogenous shocks and the institutional/decision environment in which firms and workers trade labor services. At the aggregate level, the well-documented positive persistence observed in employment fluctuations is an important sign of how efficiently an economy makes use of its labor input over time.

The way we interpret this persistence depends fundamentally on what we believe to be the cause of fluctuations. For example, if exogenous technology shocks shift the demand for labor in a persistent fashion, persistent employment dynamics may be nothing more than healthy Walrasian fluctuations. In contrast, if we believe that persistence results from matching frictions, then policies geared towards improving job finding rates may be socially desirable.

So we care about persistence in employment fluctuations because it ultimately reflects deeper structural features of the economy, and the ability of our models to “get persistence right” is crucial for our understanding of labor market dynamics.


A workhorse model in the macroeconomic literature on matching frictions is Mortensen and Pissarides (1994). This model can easily be adapted to study a host of different issues, such as the response of job flows to different labor market policies and institutions. Although the original version of the model is capable of matching important aspects of job flows behavior, recent studies have found important shortcomings in its ability to replicate a broader set of stylized facts.2 As a result, recent work has attempted to make matching models more reliable tools for policy design. While suggesting modifications and additions to the structural model is an important part of this task, equally important is to pinpoint empirically the source of misalignments present in the baseline framework. This paper does the latter using frequency-domain tools.

Author: Melissa Powell McInerney, Doctor of Philosophy, 2008, University of Maryland, College Park


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