Unemployment and Vacancy Fluctuations in the Matching Model: Inspecting the Mechanism

Andreas Hornstein (Richmond Fed economist and vice president), Per Krusell (economics professor, University of Rochester, and Richmond Fed visiting scholar), and Giovanni L. Violante (assistant professor of economics, New York University) review recent research on a widely used search model of unemployment. While the search model accounts for the qualitative features of unemployment and job-finding rates over the business cycle, it is unable to account for the magnitudes of these fluctuations. The authors conclude that when the basic search model is calibrated to generate labor market volatility of a magnitude comparable with the data, it has sharp counterfactual implications for the size and the cyclicality of the wage share and for the elasticity of unemployment to welfare benefits.