A Congestion Theory of Unemployment Fluctuations

99 Pages Posted: 23 Dec 2020 Last revised: 29 Mar 2022

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

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

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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