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Bounded rationality and unemployment dynamics

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  • Evans, David
  • Evans, George W.
  • McGough, Bruce

Abstract

Using the bounded rationality implementation developed in Evans et al. (2021), we consider unemployment dynamics driven by aggregate productivity shocks within a McCall-type labor-search model. We find that bounded rationality magnifies the impact effect of a decline in productivity on unemployment. Boundedly rational agents are overly pessimistic about wage offers during the course of a recession, resulting in higher unemployment relative to the rational model.

Suggested Citation

  • Evans, David & Evans, George W. & McGough, Bruce, 2022. "Bounded rationality and unemployment dynamics," Economics Letters, Elsevier, vol. 210(C).
    • Handle: RePEc:eee:ecolet:v:210:y:2022:i:c:s0165176521004262
    DOI: 10.1016/j.econlet.2021.110150
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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