Working Paper: NBER ID: w10326
Authors: Robert Shimer
Abstract: The standard theory of equilibrium unemployment, the Mortensen-Pissarides search and matching model, cannot explain the magnitude of the business cycle fluctuations in two of its central elements, unemployment and vacancies. Modifying the model to make the present value of wages unresponsive to current labor market conditions amplifies fluctuations in unemployment and vacancies by an order of magnitude, significantly improving the performance of the model. Despite this, the welfare consequences of such rigid wages is negligible.
Keywords: No keywords provided
JEL Codes: E24; E32; J30; J41; J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rigid wages (J31) | Unemployment fluctuations (J64) |
| Rigid wages (J31) | Vacancy fluctuations (J63) |
| Rigid wages (J31) | Welfare consequences (D69) |
| Unemployment fluctuations (J64) | Welfare consequences (D69) |