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Aggregate Demand, Idle Time, and Unemployment

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  • Pascal Michaillat
  • Emmanuel Saez

Abstract

This paper develops a model of unemployment fluctuations. The model keeps the architecture of the Barro and Grossman [1971] general disequilibrium model but replaces the disequilibrium framework on the labor and product markets by a matching framework. On the product and labor markets, both price and tightness adjust to equalize supply and demand. There is one more variable than equilibrium condition on each market, so we consider various price mechanisms to close the model, from completely flexible to completely rigid. With some price rigidity, aggregate demand influences unemployment through a simple mechanism: higher aggregate demand raises the probability that firms find customers, which reduces idle time for firms’ employees and thus increases labor demand, which in turn reduces unemployment. We use the comparative-statics predictions of the model together with empirical measures of quantities and tightnesses to re-examine the origins of labor market fluctuations. We conclude that (1) price and real wage are not fully flexible because product and labor market tightness fluctuate significantly; (2) fluctuations are mostly caused by labor demand and not labor supply shocks because employment is positively correlated with labor market tightness; and (3) labor demand shocks mostly reflect aggregate demand and not technology shocks because output is positively correlated with product market tightness.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18826.

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Date of creation: Feb 2013
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Handle: RePEc:nbr:nberwo:18826

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  1. Types of unemployment
    by Mainly Macro in Mainly Macro on 2014-08-22 12:00:00
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Cited by:
  1. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "Optimal unemployment insurance over the business cycle," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 35596, London School of Economics and Political Science, LSE Library.
  2. Emmanuel Saez & Pascal Michaillat, 2014. "An Economical Business-Cycle Model," 2014 Meeting Papers, Society for Economic Dynamics 105, Society for Economic Dynamics.

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