Search and Rest Unemployment

53 Pages Posted: 8 Feb 2008 Last revised: 20 Aug 2022

See all articles by Fernando Alvarez

Fernando Alvarez

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Robert Shimer

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2008

Abstract

This paper extends Lucas and Prescott's (1974) search model to develop a notion of rest unemployment. The economy consists of a continuum of labor markets, each of which produces a heterogeneous good. There is a constant returns to scale production technology in each labor market, but labor productivity is continually hit by idiosyncratic shocks, inducing the costly reallocation of workers across labor markets. Under some conditions, some workers may be rest-unemployed, waiting for local labor market conditions to improve, rather than engaged in time consuming search. The model has distinct notions of unemployment (moving to a new labor market or waiting for labor market conditions to improve) and inactivity (enjoying leisure while disconnected from the labor market). We obtain closed-form expressions for key aggregate variables and use them to evaluate the model. Quantitatively, we find that in the U.S. economy many more people may be in rest unemployment than in search unemployment.

Suggested Citation

Alvarez, Fernando and Shimer, Robert J., Search and Rest Unemployment (February 2008). NBER Working Paper No. w13772, Available at SSRN: https://ssrn.com/abstract=1091407

Fernando Alvarez (Contact Author)

University of Chicago - Department of Economics ( email )

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Robert J. Shimer

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States
773-702-9015 (Phone)
773-702-8490 (Fax)

HOME PAGE: http://home.uchicago.edu/~shimer/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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