TY - JOUR
T1 - The fundamental surplus
AU - Ljungqvist, Lars
AU - Sargent, Thomas J.
N1 - Funding Information:
* Ljungqvist: Stockholm School of Economics, Box 6501, SE-113 83 Stockholm, Sweden, and New York University (email: [email protected]); Sargent: New York University, 19 W 4th Street, New York, NY 10012, and Hoover Institution (email: [email protected]). We are grateful for excellent research assistance by Isaac Baley, Cecilia Parlatore Siritto, and Jesse Perla. For their comments on earlier drafts we thank four anonymous referees, participants at the conference on Recursive Methods in Economic Dynamics, in Honor of 25 Years of (the treatise by) Stokey, Lucas, and Prescott, hosted by the Federal Reserve Bank of Minneapolis, participants at the European Summer Symposium in International Macroeconomics (ESSIM) 2015, and also Ross Doppelt, John Leahy, and Eran Yashiv. We thank Nicolas Petrosky-Nadeau and Etienne Wasmer for inspiring us to add Section IVD; Lawrence Christiano, Martin Eichenbaum, and Mathias Trabandt for conducting the experiment in Section VIIB; and Robert Hall, Paul Milgrom, Andreas Hornstein, Per Krusell, and Giovanni Violante for sharing their computer codes with us. Ljungqvist’s research was supported by a grant from the Jan Wallander and Tom Hedelius Foundation. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper.
PY - 2017/9
Y1 - 2017/9
N2 - To generate big responses of unemployment to productivity changes, researchers have reconfigured matching models in various ways: by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing costly acquisition of credit, by assuming fixed matching costs, or by positing government-mandated unemployment compensation and layoff costs. All of these redesigned matching models increase responses of unemployment to movements in productivity by diminishing the fundamental surplus fraction, an upper bound on the fraction of a job's output that the invisible hand can allocate to vacancy creation. Business cycles and welfare state dynamics of an entire class of reconfigured matching models all operate through this common channel.
AB - To generate big responses of unemployment to productivity changes, researchers have reconfigured matching models in various ways: by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing costly acquisition of credit, by assuming fixed matching costs, or by positing government-mandated unemployment compensation and layoff costs. All of these redesigned matching models increase responses of unemployment to movements in productivity by diminishing the fundamental surplus fraction, an upper bound on the fraction of a job's output that the invisible hand can allocate to vacancy creation. Business cycles and welfare state dynamics of an entire class of reconfigured matching models all operate through this common channel.
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U2 - 10.1257/aer.20150233
DO - 10.1257/aer.20150233
M3 - Article
AN - SCOPUS:85029323851
SN - 0002-8282
VL - 107
SP - 2630
EP - 2665
JO - American Economic Review
JF - American Economic Review
IS - 9
ER -