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Unemployment Cycles

Eeckhout, J; Lindenlaub, I; (2019) Unemployment Cycles. American Economic Journal: Macroeconomics , 11 (4) pp. 175-234. 10.1257/mac.20180105. Green open access

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The labor market by itself can create cyclical outcomes, even in the absence of exogenous shocks. We propose a theory in which the search behavior of the employed has profound aggregate implications for the unemployed. There is a strategic complementarity between active on-the-job search and vacancy posting by firms, which leads to multiple equilibria: in the presence of sorting, active on-the-job search improves the quality of the pool of searchers. This encourages vacancy posting, which in turn makes costly on-the-job search more attractive — a self-fulfilling equilibrium. The model provides a rationale for the Jobless Recovery, the outward shift of the Beveridge curve during the boom and for pro-cyclical frictional wage dispersion. Central to the model's mechanism is the fact that the employed crowd out the unemployed when on-the-job search picks up during recovery. We also illustrate this mechanism in a stylized calibration exercise.

Type: Article
Title: Unemployment Cycles
Open access status: An open access version is available from UCL Discovery
DOI: 10.1257/mac.20180105
Publisher version: https://doi.org/10.1257/mac.20180105
Language: English
Additional information: This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: On-The-Job Search, Strategic Complementarity, Multiplicity, Unemployment Cycles, Sorting, Mismatch, Job-To-Job Flows, Jobless Recovery, Beveridge Curve Shift
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10084332
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