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The unemployment volatility puzzle: the role of the underground economy

Lisi, Gaetano (2010): The unemployment volatility puzzle: the role of the underground economy.

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Abstract

Relying on the non-negligible role played by the underground economy in the labour market fluctuations, this paper extends the standard matching model à la Mortensen-Pissarides by introducing an underground sector along with an endogenous sector choice for both entrepreneurs and workers. These modifications improve the quantitative properties of the standard matching model, thus providing a possible explanation for the unemployment volatility puzzle.

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