Unemployment cycles

Eeckhout, Jan; Lindenlaub, Ilse

doi:http://dx.doi.org/10.1257/mac.20180105

Unemployment cycles

Citation

Eeckhout J, Lindenlaub I. Unemployment cycles. American Economic Journal: Macroeconomics. 2019 Oct;11(4):175-234. DOI: 10.1257/mac.20180105

Abstract

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.