Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/126283 
Year of Publication: 
2014
Series/Report no.: 
Upjohn Institute Working Paper No. 14-214
Publisher: 
W.E. Upjohn Institute for Employment Research, Kalamazoo, MI
Abstract: 
This paper develops a model of unemployment fluctuations. The model keeps the architecture of the Barro and Grossman (1971) general disequilibrium model but replaces the disequilibrium framework on the labor and product markets by a matching framework. On the product and labor markets, both price and tightness adjust to equalize supply and demand. There is one more variable than equilibrium condition on each market, so we consider various price mechanisms to close the model, from completely flexible to completely rigid. With some price rigidity, aggregate demand influences unemployment through a simple mechanism: higher aggregate demand raises the probability that firms find customers, which reduces idle time for firms' employees and thus increases labor demand, which in turn reduces unemployment. We use the comparative-statistics predictions of the model together with empirical measures of quantities and tightnesses to re-examine the origins of labor market fluctuations. We conclude that (1) price and real wage are not fully flexible because product and labor market tightness fluctuate significantly; (2) fluctuations are mostly caused by labor demand and not labor supply shocks because employment is positively correlated with labor market tightness; and (3) labor demand shocks mostly reflect aggregate demand and not technology shocks because output is positively correlated with product market tightness.
Subjects: 
aggregate demand
unemployment
matching frictions
business cycles
JEL: 
E10
E24
E30
J2
J64
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
721.23 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.