DP1602 Equilibrium Unemployment

Author(s): Joao F Gomes, Jeremy Greenwood, Sérgio Rebelo
Publication Date: March 1997
Keyword(s): Business Cycles, Unemployment
JEL(s): E24, E32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1602

A search-theoretic general equilibrium model of frictional unemployment is shown to be consistent with some of the key regularities of unemployment over the business cycle. In the model the return to a job moves stochastically. Agents can choose either to quit and search for a better job, or continue working. Search generates job offers that agents can accept or reject. Two distinguishing features of current work, relative to the existing business cycle literature on labour market fluctuations, are: (i) the decision to accept or reject jobs is modelled explicitly; and (ii) there is imperfect insurance against unemployment.