A Congestion Theory of Unemployment Fluctuations

94 Pages Posted: 10 May 2021 Last revised: 13 Aug 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: May 2021

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.

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Suggested Citation

Mercan, Yusuf and Schoefer, Benjamin and Sedlacek, Petr, A Congestion Theory of Unemployment Fluctuations (May 2021). NBER Working Paper No. w28771, Available at SSRN: https://ssrn.com/abstract=3842746

Yusuf Mercan (Contact Author)

University of Melbourne ( email )

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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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