DP10489 The Fundamental Surplus in Matching Models

Author(s): Lars Ljungqvist, Thomas J Sargent
Publication Date: March 2015
Keyword(s): business cycle, fundamental surplus, market tightness, matching model, unemployment, volatility, welfare state
JEL(s): E24, E32, J08
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10489

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.