Mass Layoffs and Unemployment

Abstract

Mass layoffs give rise to groups of unemployed workers who possess similar characteristics and, therefore, may learn from one another's experience searching for a new job. Two factors lead them to exert too little effort in equilibrium. The first is an information externality: searchers fail to take into account the value of their experience to others. The second is an incentive to free ride: each worker would like others to experiment and reveal information concerning the location of productive jobs. Together these forces imply that in equilibrium the natural rate of unemployment is too high.

Keywords: Search, Natural rate of unemployment, Information externality

JEL Classification: E24, J64