« Fed Watch: Heading Into Jackson Hole | Main | 'Cutting Jobless Benefits Did Not Boost Employment' »

Wednesday, August 13, 2014

'Unemployment Fluctuations are Mainly Driven by Aggregate Demand Shocks'

Do the facts have a Keynesian bias?:

Using product- and labour-market tightness to understand unemployment, by Pascal Michaillat and Emmanuel Saez, Vox EU: For the five years from December 2008 to November 2013, the US unemployment rate remained above 7%, peaking at 10% in October 2009. This period of high unemployment is not well understood. Macroeconomists have proposed a number of explanations for the extent and persistence of unemployment during the period, including:

  • High mismatch caused by major shocks to the financial and housing sectors,
  • Low search effort from unemployed workers triggered by long extensions of unemployment insurance benefits, and
  • Low aggregate demand caused by a sudden need to repay debts or pessimism, but no consensus has been reached.

In our opinion this lack of consensus is due to a gap in macroeconomic theory: we do not have a model that is rich enough to account for the many factors driving unemployment – including aggregate demand – and simple enough to lend itself to pencil-and-paper analysis. ...

In Michaillat and Saez (2014), we develop a new model of unemployment fluctuations to inspect the mechanisms behind unemployment fluctuations. The model can be seen as an equilibrium version of the Barro-Grossman model. It retains the architecture of the Barro-Grossman model but replaces the disequilibrium framework on the product and labour markets with an equilibrium matching framework. ...

Through the lens of our simple model, the empirical evidence suggests that price and real wage are somewhat rigid, and that unemployment fluctuations are mainly driven by aggregate demand shocks.

    Posted by on Wednesday, August 13, 2014 at 07:47 AM in Economics, Macroeconomics, Methodology, Unemployment | Permalink  Comments (29)

          


    Comments

    Feed You can follow this conversation by subscribing to the comment feed for this post.