A Congestion Theory of Unemployment Fluctuations

94 Pages Posted: 8 Dec 2020

See all articles by Yusuf Mercan

Yusuf Mercan

University of Melbourne

Benjamin Schoefer

University of California, Berkeley

Petr Sedlacek

University of Oxford

Multiple version iconThere are 3 versions of this paper

Date Written: 2020

Abstract

In recessions, unemployment increases despite the—perhaps counterintuitive—fact that the
number of unemployed workers finding jobs expands. On net, unemployment rises only because
even more workers lose their jobs. We propose a theory of unemployment fluctuations resting on
this countercyclicality of gross flows from unemployment into employment. In recessions, the
abundance of new hires “congests” the jobs the unemployed fill, diminishes their marginal product
and discourages further job creation. Countercyclical congestion alone explains about 30–40
percent of U.S. unemployment fluctuations. Besides generating realistic labor market volatility, it
also provides a unified explanation for the cyclical labor wedge, the excess earnings losses from
job displacement and from graduating during recessions, and the insensitivity of unemployment
to labor market policies, such as unemployment insurance.

JEL Classification: E240, J630, J640

Suggested Citation

Mercan, Yusuf and Schoefer, Benjamin and Sedlacek, Petr, A Congestion Theory of Unemployment Fluctuations (2020). CESifo Working Paper No. 8731, Available at SSRN: https://ssrn.com/abstract=3744594

Yusuf Mercan (Contact Author)

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Benjamin Schoefer

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Petr Sedlacek

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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