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Equilibrium Unemployment

• Tags:
• rate,
• job,
• unemployment,
• equilibrium

Overview What determines the rate of unemployment and its movement over the business cycle? In the U.S. economy the unemployment rate moves countercyclically. So too does the average duration of unemployment, implying that it is easier to find a job in booms than in busts. Furthermore, the flows into and out of unemployment are positively correlated and move countercyclically. Are these key facts about unemployment behavior consistent with a general equilibrium labor search model in which individual job opportunities are affected by both aggregate and idiosyncratic shocks? Such a framework constitutes a natural model of the equilibrium rate of unemployment, and as such, perhaps is the ideal laboratory to examine such questions as the impact of unemployment insurance and the cost of business cycles.

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