Full Citation
Title: A Congestion Theory of Unemployment Fluctuations
Citation Type: Working Paper
Publication Year: 2020
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Abstract: In recessions, unemployment increases despite the—perhaps counterintuitive—fact that the number of unemployed workers finding jobs expands. On net, unemployment rises only because even more workers lose their jobs. We propose a theory of unemployment fluctuations resting on this countercyclicality of gross flows from unemployment into employment. In recessions, the abundance of new hires “congests” the jobs the unemployed fill, diminishes their marginal product and discourages further job creation. Countercyclical congestion alone explains about 30–40 percent of U.S. unemployment fluctuations. Besides generating realistic labor market volatility, it also provides a unified explanation for the cyclical labor wedge, the excess earnings losses from job displacement and from graduating during recessions, and the insensitivity of unemployment to labor market policies, such as unemployment insurance.
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Authors: Mercan, Yusuf; Schoefer, Benjamin; Sedláček, Petr
Series Title: CESifo Working Paper
Publication Number: 8731
Institution: Ludwigs-Maximilians University’s Center for Economic Studies and the ifo Institute
Pages: 1-94
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Data Collections: IPUMS CPS
Topics: Labor Force and Occupational Structure
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