The fundamental surplus

Lars Ljungqvist, Thomas J. Sargent

    Research output: Contribution to journalArticle

    Abstract

    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.

    Original languageEnglish (US)
    Pages (from-to)2630-2665
    Number of pages36
    JournalAmerican Economic Review
    Volume107
    Issue number9
    DOIs
    StatePublished - Sep 2017

    ASJC Scopus subject areas

    • Economics and Econometrics

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  • Cite this

    Ljungqvist, L., & Sargent, T. J. (2017). The fundamental surplus. American Economic Review, 107(9), 2630-2665. https://doi.org/10.1257/aer.20150233