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Aggregate Demand, Idle Time, and Unemployment

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Listed author(s):
  • 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
File Function: First version, 2014
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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
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:
  • 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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  1. Types of unemployment
    by Mainly Macro in Mainly Macro on 2014-08-22 12:00:00
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