A Congestion Theory of Unemployment Fluctuations
99 Pages Posted: 23 Dec 2020 Last revised: 29 Mar 2022
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A Congestion Theory of Unemployment Fluctuations
A Congestion Theory of Unemployment Fluctuations
Date Written: November 2020
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 ten-fold increase in the volatility of hiring in an otherwise standard search model, produces a realistic Beveridge curve despite countercyclical separations, and explains 30-40% 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.
JEL Classification: E24, J63, J64
Suggested Citation: Suggested Citation