Fluctuation in Equilibrium Unemployment

Robert E. Hall

NBER Working Paper No. 226
Issued in December 1977
NBER Program(s):Economic Fluctuations and Growth

Fluctuations in the equilibrium rate of unemployment can only be understood within a theory of the natural or equilibrium rate. It is not enough to say that unemployment is the difference between supply and demand in the labor market, though of course it always will be. In equilibrium, no participants in the market can have an unexploited opportunity to make themselves better off. At the equilibrium unemployment rate, employers cannot obtain labor at lower cost by offering work at below the market wage to the unemployed. Unemployed workers cannot raise their effective real incomes by taking lower wages in exchange for immediate employment. The task of the theory is to explain why any unemployment remains at all when these conditions are satisfied. Part of this problem has been studied in detail in the "search theory" of unemployment -- once a worker becomes unemployed, it is reasonably well understood why the worker does not become employed again immediately. The theory of why people become unemployed in the first place is less well developed and is the main concern of this paper. Most of the unemployed are looking for new work because their previous jobs ran out. Consequently, the main ingredient of a theory of the flow of workers into unemployment is a theory of the duration of employment. Such a theory is developed here, along reasonably standard lines.

download in pdf format
   (238 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w0226

Published: American Economic Review, Vol. 78, no. 2 (1988): 269-275. citation courtesy of

Users who downloaded this paper also downloaded* these:
Gan and Zhang w11248 The Thick Market Effect on Local Unemployment Rate Fluctuations
Hall w17179 Clashing Theories of Unemployment
Hall w0251 A Theory of the Natural Unemployment Rate and the Duration of Employment
Staiger, Stock, and Watson How Precise Are Estimates of the Natural Rate of Unemployment?
Kravis and Lipsey The Elasticity of Substitution as a Variable in World Trade
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us