Abstract: This paper proposes a search-and-matching model of unemployment in which jobs are rationed: the labor market does not clear in the absence of matching frictions. This job shortage arises in an economic equilibrium from the combination of some wage rigidity and diminishing marginal returns to labor. In recessions, job rationing is acute, driving the rise in unemployment, whereas matching frictions contribute little to unemployment. Intuitively in recessions, jobs are lacking, the labor market is slack, recruiting is easy and inexpensive, so matching frictions do not matter much. In a calibrated model, cyclical fluctuations in the composition of unemployment are large.

Working papers:

[Optimal Unemployment Insurance over the Business Cycle] [matlab code] [slides]

With: Camille Landais and Emmanuel Saez

This version: NBER working paper 16526, August 2011

Abstract: This paper characterizes optimal unemployment insurance (UI) over the business cycle using a model of equilibrium unemployment in which jobs are rationed in recession. It offers a simple optimal UI formula that can be applied to a broad class of equilibrium unemployment models. In addition to the usual statistics (risk aversion and micro-elasticity of unemployment with respect to UI), a macro-elasticity appears in the formula to capture the macroeconomic impact of UI on unemployment. In a model with job rationing, the formula implies that optimal UI is countercyclical. This result arises because in recession, jobs are lacking irrespective of job search. Therefore (1) a higher aggregate search effort cannot reduce aggregate unemployment much; and (2) individual search effort creates a negative externality by reducing other jobseekers’ probability of finding a job as in a rat race. Hence the social benefits of job search are low. In a calibrated model, optimal UI increases significantly in recession. This quantitative result holds whether the government adjusts the level or duration of benefits; whether it balances its budget each period or uses deficit spending.

[Fiscal Multipliers over the Business Cycle]

This version:  CEP discussion paper 1115, January 2012

Abstract:  This paper illustrates why fiscal policy becomes more effective as unemployment rises in recessions. The theory is based on the equilibrium unemployment model of Michaillat [forthcoming], in which jobs are rationed in recessions.  Fiscal policy takes the form of government spending on public-sector jobs. Recessions are periods of acute job shortage without much competition for workers among recruiting firms; hiring in the public sector does not crowd out hiring in the private sector much; therefore fiscal policy reduces unemployment effectively. Formally the fiscal multiplier---the reduction in unemployment rate achieved by spending one dollar on public-sector jobs---is countercyclical. An implication is that available estimates of the fiscal multiplier, which measure the average effect of fiscal policy over the business cycle, do not apply in recessions because the multiplier is much higher in recessions than on average.