New Evidence, Old Puzzles: Technology Shocks and Labor Market Dynamics

Can the standard search-and-matching labor market model repli-cate the business cycle fluctuations of the job finding rate and the unemployment rate? Based on unconditional second moments in U.S. data, Shimer (2005a) answered this question negatively. In the model, fluctuations are prominently driven by productivity shocks which are commonly interpreted as technology shocks. I estimate different types of technology shocks from structural VARs and reassess the empiri-cal performance of the standard model based on second moments that are conditional on technology shocks. Most prominently, the model replicates the conditional volatility of job finding and unemployment, so that the Shimer critique is not justified. Instead the model lacks non-technological disturbances needed to replicate the overall sample volatility. In addition, positive technology shocks lead to a fall in job finding and an increase in unemployment thereby opposing the dynam-ics in the standard model similar to the “hours puzzle ” in Gaĺı (1999)