Coordination and Unemployment

We propose a search theory of unemployment in which coordination concerns amplify and propagate shocks. Because of an aggregate demand externality, firms are more likely to create jobs when aggregate employment is high. The model features multiple equilibria under complete information, but we extend the global game approach of Schaal and Taschereau-Dumouchel (2014) to obtain uniqueness. Because coordination is persistent, the model can generate large, long-lasting unemployment crises. When unemployment is high, aggregate demand is low and firms are more likely to coordinate on low job creation. As a result, unemployment persists and job creation remains durably low. We calibrate the model to the United States economy and find that it generates more volatile, persistent and asymmetric fluctuations than a benchmark Diamond-Mortensen-Pissarides search model.