American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
A Congestion Theory of Unemployment Fluctuations
American Economic Journal: Macroeconomics
(pp. 238–85)
Abstract
We propose a theory of unemployment fluctuations in which new hires and incumbent workers are imperfect substitutes. Hence, attempts to hire away the unemployed during recessions diminish the marginal product of new hires, discouraging job creation. This single feature achieves a tenfold increase in the volatility of hiring in an otherwise standard search model, produces a realistic Beveridge curve despite countercyclical separations, and explains 30–40 percent of US unemployment fluctuations. Additionally, it explains the excess procyclicality of new hires' wages, the cyclical labor wedge, countercyclical earnings losses from job displacement, and the limited steady-state effects of unemployment insurance.Citation
Mercan, Yusuf, Benjamin Schoefer, and Petr Sedláček. 2024. "A Congestion Theory of Unemployment Fluctuations." American Economic Journal: Macroeconomics 16 (1): 238–85. DOI: 10.1257/mac.20210171Additional Materials
JEL Classification
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E32 Business Fluctuations; Cycles
- J22 Time Allocation and Labor Supply
- J23 Labor Demand
- J31 Wage Level and Structure; Wage Differentials
- J63 Labor Turnover; Vacancies; Layoffs