Working Paper: NBER ID: w13772
Authors: Fernando Alvarez; Robert Shimer
Abstract: This paper extends Lucas and Prescott's (1974) search model to develop a notion of rest unemployment. The economy consists of a continuum of labor markets, each of which produces a heterogeneous good. There is a constant returns to scale production technology in each labor market, but labor productivity is continually hit by idiosyncratic shocks, inducing the costly reallocation of workers across labor markets. Under some conditions, some workers may be rest-unemployed, waiting for local labor market conditions to improve, rather than engaged in time consuming search. The model has distinct notions of unemployment (moving to a new labor market or waiting for labor market conditions to improve) and inactivity (enjoying leisure while disconnected from the labor market). We obtain closed-form expressions for key aggregate variables and use them to evaluate the model. Quantitatively, we find that in the U.S. economy many more people may be in rest unemployment than in search unemployment.
Keywords: search unemployment; rest unemployment; labor market; economic model
JEL Codes: E24; J2; J6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| search unemployment (J64) | costly activity (G14) |
| rest unemployment (J65) | less costly activity (D23) |
| rest unemployment (J65) | wait for improved labor market conditions (J48) |
| rest unemployment (J65) | overall unemployment statistics (J64) |
| rest unemployment (J65) | observed concavity in job creation and destruction rates (J63) |
| search unemployment rates (J64) | wage autocorrelation (J31) |
| rest unemployment (J65) | higher search unemployment rate (J64) |
| search unemployment rate < 0.5 (J64) | conjecture about labor market-specific human capital accumulation (J24) |