Search and Rest Unemployment

Fernando Alvarez and Robert Shimer

No 13772, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper extends Lucas and Prescott's (1974) search model to develop a notion of rest unemployment. The economy consists of a continuum of labor markets, each of which produces a heterogeneous good. There is a constant returns to scale production technology in each labor market, but labor productivity is continually hit by idiosyncratic shocks, inducing the costly reallocation of workers across labor markets. Under some conditions, some workers may be rest-unemployed, waiting for local labor market conditions to improve, rather than engaged in time consuming search. The model has distinct notions of unemployment (moving to a new labor market or waiting for labor market conditions to improve) and inactivity (enjoying leisure while disconnected from the labor market). We obtain closed-form expressions for key aggregate variables and use them to evaluate the model. Quantitatively, we find that in the U.S. economy many more people may be in rest unemployment than in search unemployment.

JEL-codes: E24 J2 J6 (search for similar items in EconPapers)
Date: 2008-02
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
Note: EFG LS
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Citations: View citations in EconPapers (9)

Published as Fernando Alvarez & Robert Shimer, 2011. "Search and Rest Unemployment," Econometrica, Econometric Society, vol. 79(1), pages 75-122, 01.

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Journal Article: Search and Rest Unemployment (2011)
Working Paper: Search and Rest Unemployment (2008)
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