Youth Unemployment and Jobless Recoveries: A Risk-based Explanation

We quantitatively analyze an equilibrium job-matching model in the presence of time-varying discount rates and persistent aggregate shocks to labor productivity. In our model workers and firms learn about an unobservable, idiosyncratic component of match productivity. We obtain three results. First, the unemployment rate of young, inexperienced workers is more sensitive to economic conditions than older, experienced workers. Second, labor productivity shocks are amplified and propagated more strongly in states with higher discount rates. We find this effect to be quantitatively large. Third, our model features jobless recoveries which are more pronounced after recessions in which risk premia is higher. We provide empirical evidence for these findings. ∗Mitra: Ross School of Business, University of Michigan ([email protected]). Xu: Faculty of Business and Economics, University of Hong Kong ([email protected]). We thank Sugato Bhattacharyya, E. Han Kim, Ralph Koijen, Serhiy Kozak, Stefan Nagel, Paolo Pasquariello, Uday Rajan, Toni Whited, and seminar participants at the Chinese University of Hong Kong for useful comments. We thank Tae Uk Seo for providing expert research assistance.