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:||www.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.