The Unemployment‐Risk Channel in Business‐Cycle Fluctuations

ABSTRACT The unemployment‐risk channel (URC) amplifies an initial contraction through a reduction in consumption demand by workers who fear unemployment. Crucial for this are the dynamics of job separations and firm hiring. In US data, the job‐finding rate responds slower to identified macroeconomic shocks than the separation rate, but accounts for a similar share of the unemployment response. We calibrate a tractable heterogeneous‐agent new‐Keynesian model with endogenous separations and sluggish vacancy creation to match these facts. The share of output fluctuations due to the URC is twice as large as in a standard model with exogenous separations and free entry.