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Aggregate Demand, Idle Time, and Unemployment

Author Info

  • 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.

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File URL: http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2014/CFMDP2014-19-Paper.pdf
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Paper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1419.

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Length: 59 pages
Date of creation: Jul 2014
Date of revision:
Handle: RePEc:cfm:wpaper:1419
Contact details of provider: Web page: http://www.centreformacroeconomics.ac.uk/

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Find related papers by JEL classification:
  • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
  • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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Blog mentions

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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. 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.
  2. Pascal Michaillat & Emmanuel Saez, 2014. "An Economical Business-Cycle Model," NBER Working Papers 19777, National Bureau of Economic Research, Inc.
  3. Pascal Michaillat & Emmanuel Saez, 2015. "The Optimal Use of Government Purchases for Macroeconomic Stabilization," NBER Working Papers 21322, National Bureau of Economic Research, Inc.
  4. 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.
  5. Brendon, Charles & Corsetti, Giancarlo, 2016. "COEURE Survey: Fiscal and Monetary Policies after the Crises," CEPR Discussion Papers 11088, C.E.P.R. Discussion Papers.
  6. Pascal Michaillat & Emmanuel Saez & Camille Landais, 2011. "Optimal Unemployment Insurance over the Business Cycle," 2011 Meeting Papers 124, Society for Economic Dynamics.
  7. Pablo Ottonello, 2015. "Capital Unemployment, Financial Shocks, and Investment Slumps," 2015 Meeting Papers 1153, Society for Economic Dynamics.
  8. Kory Kroft & Kavan Kucko & Etienne Lehmann & Johannes Schmieder, 2015. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach," TEPP Working Paper 2015-10, TEPP.

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