A Natural Rate Model of Frictional and Long-term Unemployment

Ian King

Canadian Journal of Economics, 1990, vol. 23, issue 3, 523-45

Abstract: A simple labor market with spatial separation and Markov production shocks is presented. In the stationary equilibrium, some workers are frictionally unemployed and others are long-term unemployed. The amounts of frictional and long-term unemployment at each location depend on its recent history of productivity shocks, producing a local hysteresis effect. Changes in the parameters affect the equilibrium aggregate amounts of frictional and long-term unemployment differently. In particular, economies with larger moving costs will have more long-term and total unemployment, but less frictional unemployment. This finding is broadly consistent with recently reported stylized facts.

Date: 1990
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