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Aggregate Demand, Idle Time, and Unemployment

Author

Listed:
  • Pascal Michaillat

    () (London School of Economics (LSE), Economics Department
    Centre for Macroeconomics (CFM))

  • Emmanuel Saez

    () (University of California-Berkeley, Department of Economics)

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.

Suggested Citation

  • Pascal Michaillat & Emmanuel Saez, 2014. "Aggregate Demand, Idle Time, and Unemployment," Discussion Papers 1419, Centre for Macroeconomics (CFM).
  • Handle: RePEc:cfm:wpaper:1419
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    References listed on IDEAS

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    Cited by:

    1. Kory Kroft & Kucko Kavan & Etienne Lehmann & Johannes Schmieder, 2015. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach," Working Papers hal-01292126, HAL.
    2. Landais, Camille & Michaillat, Pascal & Saez, Emmanuel, 2010. "Optimal Unemployment Insurance over the Business Cycle," CEPR Discussion Papers 8132, C.E.P.R. Discussion Papers.
    3. Pablo Ottonello, 2015. "Capital Unemployment, Financial Shocks, and Investment Slumps," 2015 Meeting Papers 1153, Society for Economic Dynamics.
    4. Russell Wong & Guillaume Rocheteau & Zachary Bethune, 2017. "Unemployment, Aggregate Demand, and the Distribution of Liquidity," 2017 Meeting Papers 760, Society for Economic Dynamics.
    5. Luba Petersen & Guidon Fenig, 2015. "Distributing scarce jobs and output: Experimental evidence on the effects of rationing," Discussion Papers dp15-02, Department of Economics, Simon Fraser University.
    6. Pascal Michaillat & Emmanuel Saez, 2015. "The Optimal Use of Government Purchases for Stabilization," NBER Working Papers 21322, National Bureau of Economic Research, Inc.
    7. Pascal Michaillat & Emmanuel Saez, 2014. "An Economical Business-Cycle Model," Working Papers Series 6, Institute for New Economic Thinking.
    8. Focacci, Antonio, 2017. "Controversial curves of the economy: An up-to-date investigation of long waves," Technological Forecasting and Social Change, Elsevier, vol. 116(C), pages 271-285.
    9. Nils Gottfries & Karolina Stadin, 2017. "The Matching Process: Search or Mismatch?," CESifo Working Paper Series 6300, CESifo Group Munich.
    10. Gottfries, Nils & Stadin, Karolina, 2016. "The Matching Process:Search Or Mismatch?," Working Paper Series 2016:14, Uppsala University, Department of Economics.
    11. Coibion, Olivier & Gorodnichenko, Yuriy & Koustas, Dmitri, 2017. "Consumption Inequality and the Frequency of Purchases," IZA Discussion Papers 10882, Institute for the Study of Labor (IZA).
    12. Pascal Michaillat & Emmanuel Saez, 2015. "The Optimal Use of Government Purchases for Macroeconomic Stabilization," Discussion Papers 1515, Centre for Macroeconomics (CFM).
    13. Gottfries, Nils & Stadin, Karolina, 2016. "The Matching Process: Search or Mismatch," Ratio Working Papers 279, The Ratio Institute.
    14. Brendon, Charles & Corsetti, Giancarlo, 2016. "COEURE Survey: Fiscal and Monetary Policies after the Crises," CEPR Discussion Papers 11088, C.E.P.R. Discussion Papers.
    15. Stadin, Karolina, 2015. "Firms’ employment dynamics and the state of the labor market," Working Paper Series 2015:20, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    16. repec:kap:expeco:v:20:y:2017:i:3:d:10.1007_s10683-016-9507-y is not listed on IDEAS

    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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