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Modern Theory of Unemployment Fluctuations: Empirics and Policy Applications

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Author Info
Robert E. Hall
Abstract

Strong and widely accepted evidence shows that the natural rate of unemployment varies over time with substantial amplitude. The frictions in the labor market that account for positive normal levels of unemployment are not simple and mechanical. Instead, as a rich modern body of theory demonstrates, the natural rate of unemployment is an equilibrium in which the volumes of job-seeking by workers and worker-seeking by employers reach a balance controlled by fundamental determinants of the relative prices of the two activities. In recessions, unemployment rises, and job vacancies fall. The natural explanation is an economywide fall in labor demand. But a compelling model that generates a fall in labor demand without a counterfactual fall in productivity has eluded theorists to date. Nonetheless, policymakers have appropriately adopted the view that the natural rate varies over time and is not a simple benchmark for setting monetary instruments.

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File URL: http://hdl.handle.net/10.1257/000282803321946958
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File URL: http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=93&issue=2&article=23&issue_date=May2003
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 93 (2003)
Issue (Month): 2 (May)
Pages: 145-150
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Handle: RePEc:aea:aecrev:v:93:y:2003:i:2:p:145-150

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Harvard Institute of Economic Research Working Papers 1963, Harvard - Institute of Economic Research. [Downloadable!]
    Other versions:
  2. George L. Perry, 1970. "Changing Labor Markets and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(1970-3), pages 411-448. [Downloadable!]
  3. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October. [Downloadable!] (restricted)
    Other versions:
  4. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
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  5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Raven E. Saks & Abigail Wozniak, 2007. "Labor Reallocation over the Business Cycle: New Evidence from Internal Migration," IZA Discussion Papers 2766, Institute for the Study of Labor (IZA). [Downloadable!]
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  2. Michael U. Krause & Thomas A. Lubik, 2007. "On-the-job search and the cyclical dynamics of the labor market," Working Paper Series 779, European Central Bank. [Downloadable!]
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  3. Thomas A. Lubik & Michael U. Krause, 2004. "On-the-Job Search and Business Cycle Dynamics," Econometric Society 2004 North American Summer Meetings 489, Econometric Society. [Downloadable!]
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  4. Robert Dixon & John Freebairn & G. C. Lim, 2006. "Time-Varying Equilibrium Rates of Unemployment: An Analysis with Australian Data," Melbourne Institute Working Paper Series wp2006n11, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
  5. Chris Heaton & Paul Oslington, 2006. "Micro Vs Macro Explanations of Post-War US Unemployment Movements," Research Papers 0604, Macquarie University, Department of Economics. [Downloadable!]
  6. Carneiro, Anabela & Guimaraes, Paulo & Portugal, Pedro, 2009. "Real Wages and the Business Cycle: Accounting for Worker and Firm Heterogeneity," IZA Discussion Papers 4174, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Jean-Pierre Danthine & André Kurmann, 2005. "The Macroeconomic Consequences of Reciprocity in Labor Relations," Levine's Bibliography 784828000000000299, UCLA Department of Economics. [Downloadable!]
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  8. Jens Rubart, 2006. "Dismissal Protection or Wage Flexibility," Computing in Economics and Finance 2006 406, Society for Computational Economics. [Downloadable!]
  9. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March. [Downloadable!]
  10. Jean-Pierre DANTHINE & André KURMANN, 2004. "Efficiency Wages Revisited: The Internal Reference Perspective (new version)," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.09, Université de Lausanne, Faculté des HEC, DEEP, revised Jun 2005. [Downloadable!]
  11. Stéphane Auray & Samuel Danthine, 2005. "Bargaining Frictions and Hours Worked," IZA Discussion Papers 1722, Institute for the Study of Labor (IZA). [Downloadable!]
  12. Chew Lian Chua & Robert Dixon & G. C. Lim, 2007. "What Drives Worker Flows?," Melbourne Institute Working Paper Series wp2007n34, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
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