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A Mechanism of Cyclical Volatility in the Vacancy-Unemployment Ratio: What Is the Source of Rigidity?

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  • Harashima, Taiji

Abstract

The conventional search and matching model has been criticized for its inability to explain large cyclical volatility in the vacancy-unemployment ratio without ad hoc assumptions of wage rigidity. This paper presents a mechanism of such volatility without assuming wage rigidity by showing that households can rationally select a Nash equilibrium consisting of strategies of choosing a Pareto inefficient transition path. This type of path is generated after a time preference shock and causes a persistently large amount of extra unutilized resources. The labor market is thereby distorted and becomes more cyclically volatile. Vacancy costs are particularly affected by this Nash equilibrium. Because this Pareto inefficient path proceeds “rigidly,” that is, the Pareto inefficiency diminishes gradually, an ingredient of rigidity is introduced into the economy, and the vacancy-unemployment ratio experiences large cyclical fluctuations.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32476.

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Date of creation: 01 Aug 2011
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Handle: RePEc:pra:mprapa:32476

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Keywords: Vacancy; Unemployment; Rigidity; Pareto efficiency; Nash equilibrium; Business cycles; Time preference;

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Cited by:
  1. Harashima, Taiji, 2013. "The Phillips Curve and a Micro-foundation of Trend Inflation," MPRA Paper 51305, University Library of Munich, Germany.
  2. Harashima, Taiji, 2013. "Escaping a Liquidity Trap: Keynes’ Prescription Is Right But His Reasoning Is Wrong," MPRA Paper 48115, University Library of Munich, Germany.

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