Citation

Discussion Paper Details

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Title: The Fundamental Surplus in Matching Models

Author(s): Lars Ljungqvist and Thomas J Sargent

Publication Date: March 2015

Keyword(s): business cycle, fundamental surplus, market tightness, matching model, unemployment, volatility and welfare state

Programme Area(s): International Macroeconomics and Labour Economics

Abstract: To generate big responses of unemployment to productivity changes, researchers have reconfigured matching models in various ways: by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing costly acquisition of credit, or by positing government mandated unemployment compensation and layoff costs. All of these redesigned matching models increase responses of unemployment to movements in productivity by diminishing the fundamental surplus fraction, an upper bound on the fraction of a job's output that the invisible hand can allocate to vacancy creation. This single common channel unites analyses of business cycle and welfare state dynamics.

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Bibliographic Reference

Ljungqvist, L and Sargent, T. 2015. 'The Fundamental Surplus in Matching Models'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10489