Working Paper: NBER ID: w11684
Authors: Robert E. Hall
Abstract: The evolution of the aggregate labor market is far from smooth. I investigate the success of a macro model in replicating the observed levels of volatility of unemployment and other key variables. I take variations in productivity growth and in exogenous product demand (government purchases plus net exports) as the primary exogenous sources of fluctuations. The macro model embodies new ideas about the labor market, all based on equilibrium - the models I consider do not rest on inefficiency in the use of labor caused by an inappropriate wage. I find that non-standard features of the labor market are essential for understanding the volatility of unemployment. These models include simple equilibrium wage stickiness, where the sticky wage is an equilibrium selection rule. A second model based on modern bargaining theory delivers a different kind of stickiness and has a unique equilibrium. A third model posits fluctuations in matching efficiency that may arise from variations over time in the information about prospective jobs among job-seekers. Reasonable calibrations of each of the three models match the observed volatility of unemployment.
Keywords: No keywords provided
JEL Codes: E24; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| variations in productivity growth (O49) | unemployment volatility (J64) |
| exogenous product demand fluctuations (E39) | unemployment volatility (J64) |
| wage stickiness (J31) | unemployment volatility (J64) |
| matching efficiency (C52) | unemployment volatility (J64) |
| model specifications (C52) | understanding of labor market dynamics (J29) |
| productivity fluctuations (O49) | higher unemployment rates (J64) |