Working Paper: CEPR ID: DP10489
Authors: Lars Ljungqvist; Thomas J. Sargent
Abstract: To generate big responses of unemployment to productivity changes, researchers have reconfigured matching models in various ways: by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing costly acquisition of credit, or by positing government mandated unemployment compensation and layoff costs. All of these redesigned matching models increase responses of unemployment to movements in productivity by diminishing the fundamental surplus fraction, an upper bound on the fraction of a job's output that the invisible hand can allocate to vacancy creation. This single common channel unites analyses of business cycle and welfare state dynamics.
Keywords: business cycle; fundamental surplus; market tightness; matching model; unemployment volatility; welfare state
JEL Codes: E24; E32; J08
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Small fundamental surplus fraction (H62) | Increase in unemployment volatility (J64) |
| Adverse welfare state incentives (I38) | Increase in unemployment (J64) |
| Productivity changes (O49) | Increase in unemployment (J64) |
| Small fundamental surplus fraction (H62) | Increase in elasticity of market tightness (R31) |
| Fundamental surplus (D46) | Unemployment dynamics (J64) |