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The Cyclical Behavior of Equilibrium Unemployment and Vacancies

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  • Robert Shimer

Abstract

This paper argues that the textbook search and matching model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies in response to shocks of a plausible magnitude. In the United States, the standard deviation of the vacancy-unemployment ratio is almost 20 times as large as the standard deviation of average labor productivity, while the search model predicts that the two variables should have nearly the same volatility. A shock that changes average labor productivity primarily alters the present value of wages, generating only a small movement along a downward-sloping Beveridge curve (unemployment-vacancy locus). A shock to the separation rate generates a counterfactually positive correlation between unemployment and vacancies. In both cases, the model exhibits virtually no propagation.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 1 (March)
Pages: 25-49

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Handle: RePEc:aea:aecrev:v:95:y:2005:i:1:p:25-49

Note: DOI: 10.1257/0002828053828572
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  1. Katharine G. Abraham & Lawrence F. Katz, 1987. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," NBER Working Papers 1410, National Bureau of Economic Research, Inc.
  2. Hoyt Bleakley & Ann E. Ferris & Jeffrey C. Fuhrer, 1999. "New data on worker flows during business cycles," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 49-76.
  3. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  4. Stephen R. G. Jones & W. Craig Riddell, 1999. "The Measurement of Unemployment: An Empirical Approach," Econometrica, Econometric Society, Econometric Society, vol. 67(1), pages 147-162, January.
  5. Garey Ramey & Wouter J. den Haan & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 482-498, June.
  6. Chinhui Juhn & Kevin M. Murphy & Robert H. Topel, 1991. "Why Has the Natural Rate of Unemployment Increased over Time?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 75-142.
  7. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(4), pages 777-93, August.
  8. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 77(5), pages 721-54, Sept./Oct.
  9. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 3(3), pages 254-83, June.
  10. Robert E. Hall, 2003. "Modern Theory of Unemployment Fluctuations: Empirics and Policy Applications," American Economic Review, American Economic Association, American Economic Association, vol. 93(2), pages 145-150, May.
  11. Katharine G. Abraham, 1987. "Help-Wanted Advertising, Job Vacancies, and Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1), pages 207-248.
  12. Flinn, Christopher J & Heckman, James J, 1983. "Are Unemployment and Out of the Labor Force Behaviorally Distinct Labor Force States?," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 1(1), pages 28-42, January.
  13. Katharine G. Abraham & Robert Shimer, 2001. "Changes in Unemployment Duration and Labor Force Attachment," NBER Working Papers 8513, National Bureau of Economic Research, Inc.
  14. Joao Gomes & Jeremy Greenwood & Sergio Rebelo, 1997. "Equilibrium Unemployment," NBER Working Papers 5922, National Bureau of Economic Research, Inc.
  15. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 269-300, November.
  16. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 50-65, March.
  17. Shigeru Fujita, 2003. "The Beveridge Curve, Job Creation, and the Propagation of Shocks," Computing in Economics and Finance 2003 273, Society for Computational Economics.
  18. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 112-32, March.
  19. Harold L. Cole & Richard Rogerson, 1996. "Can the Mortonson-Pissarides matching model match the business cycle facts?," Staff Report, Federal Reserve Bank of Minneapolis 224, Federal Reserve Bank of Minneapolis.
  20. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
  21. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
  22. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. A Frictionless Model of Job Flows and the Beveridge Curve
    by Christian Zimmermann in NEP-DGE blog on 2010-08-23 00:24:52
  2. Rethinking the labor matching function
    by Economic Logician in Economic Logic on 2009-03-13 15:14:00
  3. Directed labor search and the cycle
    by Economic Logician in Economic Logic on 2008-08-26 15:02:00

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  1. > Macroeconomics > Economic Fluctuations > Real Business Cycle Theory > Labor in RBC models
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