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The Amplification of Unemployment Fluctuations through Self-Selection

  • Robert E. Hall

Unemployment arises from frictions in the matching of job-seekers and employers. The level of resources that employers devote to evaluating applicants for jobs is a key factor in the magnitude of the frictions. Unemployment will be low if employers can review applicants cheaply. The cost of evaluation per hire depends on the fraction of applicants who are qualified for the job. Applicants may be better informed about their qualifications than are employers. If incentives induce self-selection by job-seekers, so that they apply mainly for jobs where they are qualified, friction and thus unemployment will be low. Self-selection is strongest in markets where unemployment is low and jobs are easy to find. Because of this positive feedback, the equilibrium in a market with self-selection is fragile -- unemployment is sensitive to its determinants. Self-selection provides a mechanism for amplification of small changes in the determinants of unemployment.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11186.

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Date of creation: Mar 2005
Date of revision:
Handle: RePEc:nbr:nberwo:11186
Note: EFG LS
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  1. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  2. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  3. Katharine G. Abraham & Lawrence F. Katz, 1984. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," NBER Working Papers 1410, National Bureau of Economic Research, Inc.
  4. Stiglitz, Joseph E, 1975. "The Theory of "Screening," Education, and the Distribution of Income," American Economic Review, American Economic Association, vol. 65(3), pages 283-300, June.
  5. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  6. Montgomery, James D, 1999. "Adverse Selection and Employment Cycles," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 281-97, April.
  7. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  8. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August.
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