A Congestion Theory of Unemployment Fluctuations

Yusuf Mercan, Benjamin Schoefer and Petr Sedlacek

No 28771, NBER Working Papers from National Bureau of Economic Research, Inc

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 ten-fold increase in the volatility of hiring in an otherwise standard search model, produces a realistic Beveridge curve despite countercyclical separations, and explains 30–40% 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: D24 E24 E32 J21 J23 J64 (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-cwa, nep-ias, nep-lab and nep-mac
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Published as Yusuf Mercan & Benjamin Schoefer & Petr Sedláček, 2024. "A Congestion Theory of Unemployment Fluctuations," American Economic Journal: Macroeconomics, vol 16(1), pages 238-285.

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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 (2020)
Working Paper: A Congestion Theory of Unemployment Fluctuations (2020)
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