A Congestion Theory of Unemployment Fluctuations

Yusuf Mercan, Benjamin Schoefer and Petr Sedlacek

No 8731, CESifo Working Paper Series from CESifo

Abstract: In recessions, unemployment increases despite the—perhaps counterintuitive—fact that the number of unemployed workers finding jobs expands. On net, unemployment rises only because even more workers lose their jobs. We propose a theory of unemployment fluctuations resting on this countercyclicality of gross flows from unemployment into employment. In recessions, the abundance of new hires “congests” the jobs the unemployed fill, diminishes their marginal product and discourages further job creation. Countercyclical congestion alone explains about 30–40 percent of U.S. unemployment fluctuations. Besides generating realistic labor market volatility, it also provides a unified explanation for the cyclical labor wedge, the excess earnings losses from job displacement and from graduating during recessions, and the insensitivity of unemployment to labor market policies, such as unemployment insurance.

Keywords: unemployment; business cycles; recessions (search for similar items in EconPapers)
JEL-codes: E24 J63 J64 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-dge, nep-ias, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: A Congestion Theory of Unemployment Fluctuations (2024)
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)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8731

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