Yusuf Mercan, Benjamin Schoefer, and Petr Sedláček, newly published in American Economic Journal: Macroeconomics. I best liked this excerpt from p.2, noting that “DMP” refers to the Nobel-winning Diamond-Mortensen-Pissarides search model of unemployment: This congestion mechanism improves the business cycle performance of the DMP model considerably. It raises the volatility of labor market tightness tenfold,
The post A congestion theory of unemployment fluctuations appeared first on Marginal REVOLUTION.
Yusuf Mercan, Benjamin Schoefer, and Petr Sedláček, newly published in American Economic Journal: Macroeconomics. I best liked this excerpt from p.2, noting that “DMP” refers to the Nobel-winning Diamond-Mortensen-Pissarides search model of unemployment:
This congestion mechanism improves the business cycle performance of the DMP model considerably. It raises the volatility of labor market tightness tenfold, to empirically realistic levels. It produces a realistic Beveridge curve despite countercyclical separations. On its own, it accounts for around 30–40 percent of US unemployment fluctuations and much of its persistence. In addition, the model accounts for a range of other business cycle patterns linked to unemployment: the excess procyclicality of wages of newly hired workers compared to average wages, the countercyclical labor wedge, large countercyclical earnings losses from displacement and from labor market entry, and the long-run insensitivity of unemployment to policies such as unemployment insurance.
And by their congestion mechanism the authors mean this:
…a constant returns to scale aggregate production function that exhibits diminishing returns to new hires, a feature we call congestion in hiring.
I find that assumption plausible. It remains the case that the DMP model is grossly underrepresented in on-line writings on economics, on Twitter, and in the blogosphere. It won three Nobel Prizes, yet it also suggests that the “simple” manipulation of spending or nominal values does not automatically restore higher levels of employment.
Here are less gated versions of the paper.
The post A congestion theory of unemployment fluctuations appeared first on Marginal REVOLUTION.
Economics, Uncategorized
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