NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

High Discounts and High Unemployment

Robert E. Hall

NBER Working Paper No. 19871
Issued in January 2014, Revised in September 2014
NBER Program(s):   AP   EFG   LS   ME

In recessions, all types of investment fall, including employers' investment in job creation. The stock market falls more than in proportion to corporate profit. The discount rate implicit in the stock market rises, and discounts for other claims on business income also rise. According to the leading view of unemployment-the Diamond-Mortensen-Pissarides model-when the incentive for job creation falls, the labor market slackens and unemployment rises. Employers recover their investments in job creation by collecting a share of the surplus from the employment relationship. The value of that flow falls when the discount rate rises. Thus high discount rates imply high unemployment. This paper does not explain why the discount rate rises so much in recessions. Rather, it shows that the rise in unemployment makes perfect economic sense in an economy where, for some reason, the discount rises substantially in recessions.

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Document Object Identifier (DOI): 10.3386/w19871

Published: Robert E. Hall, 2017. "High Discounts and High Unemployment," American Economic Review, vol 107(2), pages 305-330.

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