Understanding European unemployment with a representative family model

Lars Ljungqvist, Thomas Sargent

    Research output: Contribution to journalArticle

    Abstract

    A representative family model with indivisible labor and employment lotteries has no labor market frictions and complete markets. Nevertheless, its aggregate responses to an increase in government supplied unemployment insurance (UI) and to an increase in microeconomic turbulence are qualitatively similar to those in two macromodels with labor market frictions and incomplete markets, namely, the matching and search-island models in Ljungqvist and Sargent [2007a. Understanding European unemployment with matching and search-island models. Journal of Monetary Economics, this issue]. Because there is no frictional unemployment in the representative family model, an increase in employment protection (EP) decreases aggregate work because the representative family substitutes leisure for work, an effect opposite to what occurs in matching and search-island models. Heterogeneity among workers highlights the economy-wide coordination in labor supply and consumption sharing that employment lotteries and complete markets achieve in the representative family model. A high disutility of labor makes generous UI cause very low employment levels.

    Original languageEnglish (US)
    Pages (from-to)2180-2204
    Number of pages25
    JournalJournal of Monetary Economics
    Volume54
    Issue number8
    DOIs
    StatePublished - Nov 2007

    Fingerprint

    European unemployment
    Search and matching
    Labor market frictions
    Lottery
    Unemployment insurance
    Complete markets
    Government
    Labor supply
    Microeconomics
    Turbulence
    Employment protection
    Worker heterogeneity
    Unemployment
    Macro model
    Substitute
    Labor
    Monetary economics
    Indivisible labor
    Leisure
    Incomplete markets

    Keywords

    • Employment protection
    • Lotteries
    • Representative family
    • Turbulence
    • Unemployment insurance

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Finance

    Cite this

    Understanding European unemployment with a representative family model. / Ljungqvist, Lars; Sargent, Thomas.

    In: Journal of Monetary Economics, Vol. 54, No. 8, 11.2007, p. 2180-2204.

    Research output: Contribution to journalArticle

    Ljungqvist, Lars ; Sargent, Thomas. / Understanding European unemployment with a representative family model. In: Journal of Monetary Economics. 2007 ; Vol. 54, No. 8. pp. 2180-2204.
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