Unemployment Cycles

Jan Eeckhout and Ilse Lindenlaub

American Economic Journal: Macroeconomics, 2019, vol. 11, issue 4, 175-234

Abstract: The labor market by itself can create cyclical outcomes, even in the absence of exogenous shocks. We propose a theory in which the search behavior of the employed has profound aggregate implications for the unemployed. There is a strategic complementarity between active on-the-job search and vacancy posting by firms, which leads to multiple equilibria: in the presence of sorting, active on-the-job search improves the quality of the pool of searchers. This encourages vacancy posting, which in turn makes costly on-the-job search more attractive—a self-fulfilling equilibrium. The model provides a rationale for the Jobless Recovery, the outward shift of the Beveridge curve during the boom and for pro-cyclical frictional wage dispersion. Central to the model's mechanism is the fact that the employed crowd out the unemployed when on-the-job search picks up during recovery. We also illustrate this mechanism in a stylized calibration exercise.

JEL-codes: E24 E32 J63 J64 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mac.20180105
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Citations: View citations in EconPapers (10)

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Working Paper: Unemployment cycles (2015)
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