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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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References

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  1. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2011. "Optimal Unemployment Insurance Over the Business Cycle," CEP Discussion Papers dp1078, Centre for Economic Performance, LSE.
  2. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  3. Greg Kaplan & Guido Menzio, 2013. "Shopping Externalities and Self-Fulfilling Unemployment Fluctuations," NBER Working Papers 18777, National Bureau of Economic Research, Inc.
  4. Robert E. Hall, 2008. "General Equilibrium with Customer Relationships: A Dynamic Analysis of Rent-Seeking," 2008 Meeting Papers 312, Society for Economic Dynamics.
  5. Roger E. A. Farmer, 2007. "Aggregate Demand and Supply," NBER Working Papers 13406, National Bureau of Economic Research, Inc.
  6. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  7. Pascal Michaillat, 2010. "Do Matching Frictions Explain Unemployment? Not in Bad Times," CEP Discussion Papers dp1024, Centre for Economic Performance, LSE.
  8. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  9. Montgomery, James D, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 163-79, February.
  10. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
  11. Ven Der Linden B. & Lehmann E., 2006. "Search Frictions on Product and Labor markets," Working Papers ERMES 0604, ERMES, University Paris 2.
  12. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.
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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. Pascal Michaillat & Emmanuel Saez & Camille Landais, 2011. "Optimal Unemployment Insurance over the Business Cycle," 2011 Meeting Papers 124, Society for Economic Dynamics.
  2. Pascal Michaillat & Emmanuel Saez, 2014. "An Economical Business-Cycle Model," NBER Working Papers 19777, National Bureau of Economic Research, Inc.

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