Unemployment Benefits and Matching Efficiency in an Estimated DSGE Model with Labor Market Search

Abstract

To explain the high and persistent unemployment rate in the U.S. during and after the Great Recession, this effort develops and estimates a DSGE model with search and matching frictions and shocks to unemployment benefits and matching efficiency. It finds that the unemployment benefits play an important role in the cyclical movement of unemployment through their effects on labor demand, a channel overlooked in previous studies. From the second half of 2008 to 2011, extended unemployment benefits may have increased the overall unemployment rate by 1 percentage point. In contrast, matching efficiency changes have less effect on the cyclical movement of unemployment for the same period, but significantly slowed down the recovery after 2012.

Keywords: DSGE, search and matching frictions, unemployment benefits, matching efficiency

JEL Classification: E24, E32, E52, J64