Working Paper

The Shimer puzzle and the identification of productivity shocks

Abstract: Shimer (2005) argues that the Mortensen-Pissarides (MP) model of unemployment lacks an amplification mechanism because it generates less than 10 percent of the observed business cycle fluctuations in unemployment given labor productivity shocks of plausible magnitude. This paper argues that part of the problem lies with the identification of productivity shocks. Because of the endogeneity of measured labor productivity, filtering out the trend component as in Shimer (2005) may not correctly identify the shocks driving unemployment. Using a New-Keynesian framework to control for the endogeneity of productivity, this paper estimates that the MP model can account for a third, and possibly as much as 60 percent, of fluctuations in labor market variables.

Keywords: Labor market; Unemployment; Labor productivity;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2009

Number: 2009-04