American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Modern Theory of Unemployment Fluctuations: Empirics and Policy Applications
American Economic Review
(pp. 145–150)
Abstract
Strong and widely accepted evidence shows that the natural rate of unemployment varies over time with substantial amplitude. The frictions in the labor market that account for positive normal levels of unemployment are not simple and mechanical. Instead, as a rich modern body of theory demonstrates, the natural rate of unemployment is an equilibrium in which the volumes of job-seeking by workers and worker-seeking by employers reach a balance controlled by fundamental determinants of the relative prices of the two activities. In recessions, unemployment rises, and job vacancies fall. The natural explanation is an economywide fall in labor demand. But a compelling model that generates a fall in labor demand without a counterfactual fall in productivity has eluded theorists to date. Nonetheless, policymakers have appropriately adopted the view that the natural rate varies over time and is not a simple benchmark for setting monetary instruments.Citation
Hall, Robert, E. 2003. "Modern Theory of Unemployment Fluctuations: Empirics and Policy Applications ." American Economic Review 93 (2): 145–150. DOI: 10.1257/000282803321946958JEL Classification
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
- J64 Unemployment: Models, Duration, Incidence, and Job Search