Marginal jobs, heterogeneous firms, & unemployment flows. NBER Working Paper

Much recent research has sought to explain the cyclical amplitude of unemployment uctuations in the US. This paper shows that ampli\u85cation of the cyclical variation of unemployment can be obtained from adding two very simple features to an otherwise standard model of the aggregate labor market, namely downward sloped short run la-bor demand and endogenous job destruction. This generalized model is able to match more closely the cyclicality of both job \u85nding and employment to unemployment ows observed in US data. Contrary to standard models, the model can generate ampli-cation while maintaining realistic surplus to employment relationships. In addition, we uncover a novel source of ampli\u85cation of cyclical shocks that is generated by the interaction of countercyclical unemployment inows and job creation. We are especially grateful to Gary Solon and Matthew Shapiro for their comments, support, and encour-agement, and to anonymous reviewers at the National Science Foundation for very constructive comments. We would also like to thank Shigeru Fujita, William Hawkins, and Dmitriy Stolyarov, as well as semina