Marginal Jobs, Heterogeneous Firms, & Unemployment Flows

Much recent research has sought to explain the cyclical amplitude of unemployment fluctuations in the US. This paper shows that amplification of the cyclical variation of unemployment can be obtained from adding two very simple features to an otherwise standard model of the aggregate labor market, namely downward sloped short run labor demand and endogenous job destruction. This generalized model is able to match more closely the cyclicality of both job finding and employment to unemployment flows observed in US data. Contrary to standard models, the model can generate amplification while maintaining realistic surplus to employment relationships. In addition, we uncover a novel source of amplification of cyclical shocks that is generated by the interaction of countercyclical unemployment inflows and job creation.

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