Unemployment in a Production Network
63 Pages Posted: 21 May 2023 Last revised: 11 Dec 2023
Date Written: May 15, 2023
Abstract
We model a production network economy with sectoral and occupational unemployment by incorporating matching between job-seekers across various occupations and employers in different production sectors. In combination, these two realistic features of any modern economy lead to large and pervasive unemployment responses across sectors and occupations. In addition, our model predicts larger output responses relative to an efficient production network. We demonstrate the empirical significance of our novel propagation mechanism by calibrating our model to the U.S. economy. A 1% productivity shock to the durable manufacturing sector results in a 0.41% increase in real GDP, and a 0.22pp decrease in unemployment. In contrast, in an efficient production network model, the same shock results in a 0.26% increase in GDP and no change in unemployment.
Keywords: Production Network, Search Frictions, Tightness, Unemployment
JEL Classification: E1, J3, J6
Suggested Citation: Suggested Citation