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| Uncertainty Shocks, Structural Unemployment and Employment Stability Policies: Based on a Directed Searching and Matching Model with Public and Entrepresis Sectors |
| LIN Bin, SUN Qian, WANG Dihai
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School of International Business, Shanghai University of International Business and Economics;
School of Economics, Fudan University |
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Abstract In recent years, high unemployment rate, particularly among the youth, has drawn widespread societal attention in China. China's economy has long exhibited a dual labor market structure segmented between the public and private sectors. The stability and higher wages of public sector jobs have fostered a strong preference for public employment, making it a crucial mechanism for workers to hedge against market uncertainties. With rising economic uncertainty, labor market choices—especially among university graduates—have shifted increasingly toward public sector jobs, fueling social phenomena such as “Civil Service Exam Craze”, “Public Institution Exam Craze”, and “Teaching Certification Craze”. In response to this severe employment situation, the central government has implemented various employment stabilization policies, focusing on fiscal measures to secure job opportunities, particularly for young workers. However, it remains unclear whether these policies can effectively mitigate preference for public employment, reduce structural unemployment, and enhance fiscal efficiency. To address these questions, this paper conducts an in-depth empirical and theoretical analysis to explore how uncertainty shocks distort labor market allocation, generate structural unemployment, and amplify macroeconomic fluctuations. Furthermore, we develop and quantitatively evaluate various types of simple rule-based employment stabilization policies from the perspectives of economic cycles, welfare costs, and government expenditure multipliers.
Empirical evidence suggests that the primary reasons for the preference for public sector jobs are their stability and higher wages. However, the limited supply of public sector vacancies increases the likelihood of unemployment among those pursuing such positions. Empirical analysis, which matches city-level uncertainty indicators with individual-level labor data, shows that higher economic uncertainty strengthens the preference for public sector employment, thereby exacerbating the overall unemployment rate.
Based on the dual segmentation of the public and private labor sectors, this paper constructs a two-sector directed search and matching New Keynesian Dynamic Stochastic General Equilibrium (NK-DSGE) model. Theoretical and numerical simulations reveal that, on the one hand, uncertainty shocks reduce aggregate demand, decrease job supply and wages in the private sector, and thereby generate cyclical unemployment. On the other hand, the relative stability of public sector wages and vacancies attracts more job seekers into the public sector labor market, distorting labor market allocation and generating structural unemployment. It further increases the overall unemployment rate and amplifies economic fluctuations. Impulse response analysis shows that structural unemployment accounts for nearly 40% of the total unemployment effect induced by uncertainty shocks.
The evaluation of simple rule-based employment stabilization policies suggests that a pro-cyclical public sector wage policy can effectively balance employment stabilization with fiscal efficiency in the face of uncertainty shocks. On the one hand, the pro-cyclical public wage policy requires public sector wages to decrease in tandem with private sector wages, preventing excessive labor congestion in the public sector and reducing structural unemployment. On the other hand, this policy optimizes labor market allocation, curbing the overexpansion of public sector employment and fiscal expenditure, reducing the crowding-out effect on private sector labor, and contributing to macroeconomic and fiscal rebalancing.
The marginal contributions of this paper are threefold. First, it develops a directed search and matching NK-DSGE model incorporating both public and private sectors, based on empirical evidence, to investigate the transmission mechanism through which uncertainty shocks generate structural unemployment. The model is calibrated using real economic data from China to evaluates the effectiveness of employment stabilization policies. Second, it explains how uncertainty shocks generate structural unemployment and amplify economic fluctuations through the dual labor market structure, offering a novel theoretical amplification mechanism not previously explored in the literature. Third, this study enriches the literature by analyzing employment stabilization policies from multiple perspectives, including economic cycles, welfare costs, and government expenditure multipliers, moving beyond the traditional focus on job creation alone.
Given the relatively underdeveloped social security system in China, the public sector remains a vital mechanism for workers to hedge against uncertainties. To address the structural unemployment caused by uncertainty shocks, particularly among young people, the government should adopt more proactive employment stabilization policies. First, the pro-cyclical public wage policy can help narrow the income and welfare gap between the public and private sectors, alleviating the preference for public sector employment and reducing structural unemployment. Second, while moderately expanding public sector job supply, it is crucial to establish a rational exit mechanism to break the entrenched perception of the “iron rice bowl” (lifelong secure employment). Lastly, a more comprehensive social security system should be developed to expand the coverage of the “five insurances and one fund” in the private sector, thereby mitigating the impact of uncertainty shocks on household income.
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Received: 05 May 2024
Published: 02 December 2024
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| Cite this article: |
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LIN Bin,SUN Qian,WANG Dihai. Uncertainty Shocks, Structural Unemployment and Employment Stability Policies: Based on a Directed Searching and Matching Model with Public and Entrepresis Sectors[J]. Journal of Financial Research,
2024, 533(11): 1-19.
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| URL: |
| http://www.jryj.org.cn/EN/ OR http://www.jryj.org.cn/EN/Y2024/V533/I11/1 |
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