A Congestion Theory of Unemployment Fluctuations

96 Pages Posted: 23 Dec 2020 Last revised: 11 Feb 2021

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: November 2020

Abstract

In recessions, unemployment increases despite the - perhaps counterintuitive - fact that the number of unemployed workers finding jobs expands. 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 - diminishing their marginal product and discouraging further job creation. Countercyclical congestion explains 30-40% of US unemployment fluctuations. Additionally, it explains the excess procyclicality of new hires' wages, the cyclical labor wedge, the large earnings losses from job displacement and from graduating during recessions, and the insensitivity of unemployment to policies such as unemployment insurance.

JEL Classification: E24, J63, J64

Suggested Citation

Mercan, Yusuf and Schoefer, Benjamin and Sedlacek, Petr, A Congestion Theory of Unemployment Fluctuations (November 2020). CEPR Discussion Paper No. DP15500, Available at SSRN: https://ssrn.com/abstract=3753899

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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