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The Fundamental Surplus

Lars Ljungqvist and Thomas Sargent ()

American Economic Review, 2017, vol. 107, issue 9, 2630-65

Abstract: To generate big responses of unemployment to productivity changes, researchers have reconfigured matching models in various ways: by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing costly acquisition of credit, by assuming fixed matching costs, or by positing government-mandated unemployment compensation and layoff costs. All of these redesigned matching models increase responses of unemployment to movements in productivity by diminishing the fundamental surplus fraction, an upper bound on the fraction of a job's output that the invisible hand can allocate to vacancy creation. Business cycles and welfare state dynamics of an entire class of reconfigured matching models all operate through this common channel.

JEL-codes: E23 E24 E32 J24 J31 J41 J63 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20150233
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