Working Paper: CEPR ID: DP15500
Authors: Yusuf Mercan; Benjamin Schoefer; Petr Sedlek
Abstract: We propose a theory of unemployment fluctuations in which new hires and incumbent workers are imperfect substitutes. Hence, attempts to hire away the unemployed during recessions diminish the marginal product of new hires, discouraging job creation. This single feature achieves a ten-fold increase in the volatility of hiring in an otherwise standard search model, produces a realistic Beveridge curve despite countercyclical separations, and explains 30-40% of US unemployment fluctuations. Additionally, it explains the excess procyclicality of new hires' wages, the cyclical labor wedge, countercyclical earnings losses from job displacement, and the limited steady-state effects of unemployment insurance.
Keywords: No keywords provided
JEL Codes: J64; J63; E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased unemployment (J64) | Decrease in the marginal product of new hires (J23) |
| Decrease in the marginal product of new hires (J23) | Reduction in job creation (J23) |
| Increased unemployment (J64) | Reduction in job creation (J23) |
| Congestion in hiring (J23) | Increased unemployment fluctuations (J64) |
| Countercyclical separation rates (J63) | Congestion in hiring (J23) |
| Increased unemployment (J64) | Dilution of productivity of new hires (J24) |
| Procyclicality of new hire wages (J39) | Congestion in hiring (J23) |
| Countercyclical earnings losses from job displacement (J65) | Congestion in hiring (J23) |
| Separation rate shocks (J63) | Labor market tightness (J20) |