Abstract:
We propose a theory of labor market fluctuations based on countercyclical congestion in the hiring of unemployed workers. We document and put to use the fact that the number of workers moving from unemployment back into employment is countercyclical. In recessions, the resulting abundance of new hires in employment diminishes their marginal product. This ``congestion'' in the jobs the unemployed fill curbs further hiring and rationalizes the rise and persistence of unemployment. Countercyclical congestion can explain more than 40% of U.S. unemployment fluctuations. It additionally provides a unified explanation for the cyclical labor wedge, the excess earnings losses from job loss and graduating in recessions, and the insensitivity of unemployment to policies such as unemployment insurance.
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