The Fundamental Surplus in Matching Models

48 Pages Posted: 16 Mar 2015

See all articles by Lars Ljungqvist

Lars Ljungqvist

Stockholm School of Economics - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business; National Bureau of Economic Research (NBER)

Date Written: March 2015

Abstract

To generate big responses of unemployment to productivity changes, researchers have reconfigured matching models in various ways: by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing costly acquisition of credit, or by positing government mandated unemployment compensation and layoff costs. All of these redesigned matching models increase responses of unemployment to movements in productivity by diminishing the fundamental surplus fraction, an upper bound on the fraction of a job's output that the invisible hand can allocate to vacancy creation. This single common channel unites analyses of business cycle and welfare state dynamics.

Keywords: business cycle, fundamental surplus, market tightness, matching model, unemployment, volatility, welfare state

JEL Classification: E24, E32, J08

Suggested Citation

Ljungquist, Lars and Sargent, Thomas J., The Fundamental Surplus in Matching Models (March 2015). CEPR Discussion Paper No. DP10489, Available at SSRN: https://ssrn.com/abstract=2579239

Lars Ljungquist (Contact Author)

Stockholm School of Economics - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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IZA Institute of Labor Economics

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Thomas J. Sargent

New York University (NYU) - Department of Economics, Leonard N. Stern School of Business ( email )

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National Bureau of Economic Research (NBER)

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