American Economic Review: Vol. 95 No. 1 (March 2005)
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The Cyclical Behavior of Equilibrium Unemployment and Vacancies
Shimer, Robert. 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies." American Economic Review, 95(1): 25-49.
This paper argues that the textbook search and matching model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies in response to shocks of a plausible magnitude. In the United States, the standard deviation of the vacancy-unemployment ratio is almost 20 times as large as the standard deviation of average labor productivity, while the search model predicts that the two variables should have nearly the same volatility. A shock that changes average labor productivity primarily alters the present value of wages, generating only a small movement along a downward-sloping Beveridge curve (unemployment-vacancy locus). A shock to the separation rate generates a counterfactually positive correlation between unemployment and vacancies. In both cases, the model exhibits virtually no propagation.
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