Arbeitspapier

Aggregate demand, idle time, and unemployment

This paper develops a model of unemployment fluctuations. The model keeps the architecture of the Barro and Grossman (1971) general disequilibrium model but replaces the disequilibrium framework on the labor and product markets by a matching framework. On the product and labor markets, both price and tightness adjust to equalize supply and demand. There is one more variable than equilibrium condition on each market, so we consider various price mechanisms to close the model, from completely flexible to completely rigid. With some price rigidity, aggregate demand influences unemployment through a simple mechanism: higher aggregate demand raises the probability that firms find customers, which reduces idle time for firms' employees and thus increases labor demand, which in turn reduces unemployment. We use the comparative-statistics predictions of the model together with empirical measures of quantities and tightnesses to re-examine the origins of labor market fluctuations. We conclude that (1) price and real wage are not fully flexible because product and labor market tightness fluctuate significantly; (2) fluctuations are mostly caused by labor demand and not labor supply shocks because employment is positively correlated with labor market tightness; and (3) labor demand shocks mostly reflect aggregate demand and not technology shocks because output is positively correlated with product market tightness.

Language
Englisch

Bibliographic citation
Series: Upjohn Institute Working Paper ; No. 14-214

Classification
Wirtschaft
General Aggregative Models: General
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
Unemployment: Models, Duration, Incidence, and Job Search
Subject
aggregate demand
unemployment
matching frictions
business cycles

Event
Geistige Schöpfung
(who)
Michaillat, Pascal
Saez, Emmanuel
Event
Veröffentlichung
(who)
W.E. Upjohn Institute for Employment Research
(where)
Kalamazoo, MI
(when)
2014

DOI
doi:10.17848/wp14-214
Handle
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Michaillat, Pascal
  • Saez, Emmanuel
  • W.E. Upjohn Institute for Employment Research

Time of origin

  • 2014

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