TY - JOUR AU - Davis,Steven J. AU - Faberman,R. Jason AU - Haltiwanger,John AU - Jarmin,Ron AU - Miranda,Javier TI - Business Volatility, Job Destruction, and Unemployment JF - National Bureau of Economic Research Working Paper Series VL - No. 14300 PY - 2008 Y2 - September 2008 UR - http://www.nber.org/papers/w14300 L1 - http://www.nber.org/papers/w14300.pdf N1 - Author contact info: Steven J. Davis Booth School of Business The University of Chicago 5807 South Woodlawn Avenue Chicago, IL 60637 Tel: 773/702-7312 Fax: 773/834-0733 E-Mail: Steven.Davis@ChicagoBooth.edu Jason Faberman Economic Research Department Federal Reserve Bank of Chicago 230 S. LaSalle St. Chicago, IL 60604 Tel: (312) 322-5274 Fax: (312) 322-2357 E-Mail: jfaberman@frbchi.org John C. Haltiwanger Department of Economics University of Maryland College Park, MD 20742 Tel: 301/405-3504 Fax: 301/405-3542 E-Mail: haltiwan@econ.umd.edu Ron S. Jarmin Center for Economic Studies U.S. Census Bureau 4600 Silver Hill Road Washington, DC 20233 Tel: 301.763.1858 Fax: 301.763.5935 E-Mail: ron.s.jarmin@census.gov Javier Miranda U.S. Bureau of the Census Center for Economic Studies 4600 Silver Hill Road Washington, DC 20233 Tel: 301-763-6466 E-Mail: javier.miranda@census.gov AB - Unemployment inflows fell from 4 percent of employment per month in the early 1980s to 2 percent or less by the mid 1990s and thereafter. U.S. data also show a secular decline in the job destruction rate and the volatility of firm-level employment growth rates. We interpret this decline as a decrease in the intensity of idiosyncratic labor demand shocks, a key parameter in search and matching models of unemployment. According to these models, a lower intensity of idiosyncratic shocks produces less job destruction, fewer workers flowing through the unemployment pool and less frictional unemployment. To evaluate the importance of this theoretical mechanism, we relate industry-level unemployment flows from 1977 to 2005 to industry-level indicators for the intensity of idiosyncratic shocks. Unlike previous research, we focus on the lower frequency relationship of job destruction and business volatility to unemployment flows. We find strong evidence that declines in the intensity of idiosyncratic labor demand shocks drove big declines in the incidence and rate of unemployment. This evidence implies that the unemployment rate has become much less sensitive to cyclical movements in the job-finding rate. ER -