A Congestion Theory of Unemployment Fluctuations

Yusuf Mercan, Benjamin Schoefer and Petr Sedlacek

American Economic Journal: Macroeconomics, 2024, vol. 16, issue 1, 238-85

Abstract: We propose a theory of unemployment fluctuations in which new hires and incumbent workers are imperfect substitutes. Hence, attempts to hire away the unemployed during recessions diminish the marginal product of new hires, discouraging job creation. This single feature achieves a tenfold increase in the volatility of hiring in an otherwise standard search model, produces a realistic Beveridge curve despite countercyclical separations, and explains 30–40 percent of US unemployment fluctuations. Additionally, it explains the excess procyclicality of new hires' wages, the cyclical labor wedge, countercyclical earnings losses from job displacement, and the limited steady-state effects of unemployment insurance.

JEL-codes: E24 E32 J22 J23 J31 J63 (search for similar items in EconPapers)
Date: 2024
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Related works:
Working Paper: A Congestion Theory of Unemployment Fluctuations (2022)
Working Paper: A Congestion Theory of Unemployment Fluctuations (2021)
Working Paper: A Congestion Theory of Unemployment Fluctuations (2020)
Working Paper: A Congestion Theory of Unemployment Fluctuations (2020)
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DOI: 10.1257/mac.20210171

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