Working Paper No. 07-12/r Dynamics of Worker Flows and Vacancies: Evidence from the Sign Restriction Approach

This paper establishes robust dynamic features of the worker reallocation process in the U.S. labor market. I use structural VARs with sign restrictions, which take the form of restricting the short-run negative relationship between vacancies and unemployment (i.e., Beveridge curve). Despite the “weakness” of these restrictions, they reveal a clear, unambiguous pattern that when unemployment increases and vacancies drop, (i) both the separation rate and gross separations rise quickly and remain persistently high, (ii) the job finding rate and vacancies drop in a hump-shaped manner, and (iii) gross hires respond little initially, but eventually rise. These results point to the importance of job loss in understanding U.S. labor market dynamics. This pattern also holds with respect to different kinds of shocks that induce the same Beveridge curve relationship. Given the robustness, these results should be taken seriously in the quantitative macro/labor literature. This paper also considers the “disaggregate model,” which uses data disaggregated into six demographic groups and incorporates transitions into and out of the labor force. I find that the separation rate continues to play a dominant role among prime-age male workers, while, for other groups, changes in the job finding rate are more important. JEL codes: C32, J63, J64