Working Paper: NBER ID: w28771
Authors: Yusuf Mercan; Benjamin Schoefer; Petr Sedlcek
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: Unemployment; Hiring; Labor Market; Congestion Theory
JEL Codes: D24; E24; E32; J21; J23; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| separation rate (J63) | labor market tightness (J20) |
| unemployment increases (J64) | job creation elasticity (J23) |
| increased hiring from unemployment (J68) | marginal product of labor (J49) |
| hiring dynamics (M51) | unemployment rates (J64) |
| congestion mechanism (L91) | countercyclical nature of job separations (J63) |
| congestion mechanism (L91) | procyclicality of new hire wages (J39) |