A Congestion Theory of Unemployment Fluctuations

97 Pages Posted: 10 May 2021 Last revised: 20 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: May 2021


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.

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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 )

185 Pelham Street
Carlton, Victoria 3053

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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