Abstract |
Unemployment shows persistent and long lasting responses to nominal and real shocks.
Standard real business cycle models with search frictions but homogeneous labor force are able
to generate some persistence, but not enough to match the empirical evidence. Moreover,
empirical studies emphasize the importance of the heterogeneity of the unemployment pool
to fully understand unemployment dynamics. In particular, in most European countries the
incidence of long term unemployment is big and well known. One of the causes/consequences
of long-term unemployment is the skill deterioration of the unemployment pool. In this paper
we introduce the loss of skill mechanism, and therefore an heterogeneous labor force, in a New
Keynesian framework with search frictions. Calibrating the model to the Spanish economy,
we show that the loss of skill mechanism helps to explain the persistence in the response of
unemployment to monetary shocks. |