A note on the unemployment volatility puzzle

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This paper features an economy with frictional labour markets, Nash bargaining, cyclical opportunity cost of employment and demand-determined output. I show that the model generates big responses of unemployment to productivity movements. The key insight is that strongly countercyclical markups amplify the impact of aggregate shocks on the fundamental surplus, and as a consequence, on labour market outcomes. This answers the critique of Chodorow-Reich and Karabarbounis that the cyclicality of the opportunity cost poses a challenge to the solution of the unemployment volatility puzzle.
Original languageEnglish
Article numbergpac012
JournalOxford Economic Papers
Publication statusE-pub ahead of print - 28 Apr 2022


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