DP15500 A Congestion Theory of Unemployment Fluctuations

Author(s): Yusuf Mercan, Benjamin Schoefer, Petr Sedlacek
Publication Date: November 2020
JEL(s): E24, J63, J64
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15500

In recessions, unemployment increases despite the-perhaps counterintuitive-fact that the number of unemployed workers finding jobs expands. On net, unemployment rises only because even more workers lose their jobs. We propose a theory ofunemployment fluctuations resting on this countercyclicality of gross flows from unemployment into employment. In recessions, the abundance of new hires "congests" the jobs the unemployed fill, diminishes their marginal product and discourages further job creation. Countercyclical congestion alone explains about 30â??40 percent of U.S. unemployment fluctuations. Besides generating realistic labor market volatility, it also provides a unified explanation for the cyclical labor wedge, the excess earningslosses from job displacement and from graduating during recessions, and the insensitivity of unemployment to labor market policies, such as unemployment insurance.