The Cyclical Behavior of Equilibrium Unemployment and Vacancies: Evidence and Theory

46 Pages Posted: 8 Mar 2003 Last revised: 31 Oct 2010

See all articles by Robert Shimer

Robert Shimer

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 2003

Abstract

This paper argues that a broad class of search models cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies in response to shocks of a plausible magnitude. In the U.S., the vacancy-unemployment ratio is 20 times as volatile as average labor productivity, while under weak assumptions, search models predict that the vacancy-unemployment ratio and labor productivity have nearly the same variance. I establish this claim both using analytical comparative statics in a very general deterministic search model and using simulations of a stochastic version of the model. I show that a shock that changes average labor productivity primarily alters the present value of wages, generating only a small movement along a downward sloping Beveridge curve (unemployment-vacancy locus). A shock to the job destruction rate generates a counterfactually positive correlation between unemployment and vacancies. In both cases, the shock is only slightly amplified and the model exhibits virtually no propagation. I reconcile these findings with an existing literature and argue that the source of the model's failure is lack of wage rigidity, a consequence of the assumption that wages are determined by Nash bargaining.

Suggested Citation

Shimer, Robert J., The Cyclical Behavior of Equilibrium Unemployment and Vacancies: Evidence and Theory (March 2003). NBER Working Paper No. w9536. Available at SSRN: https://ssrn.com/abstract=386165

Robert J. Shimer (Contact Author)

University of Chicago - Department of Economics ( email )

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