Abstract
AbstractAggregate matching efficiency (AME) is constructed and endogenized for assessing driving forces behind U.S. unemployment fluctuations. Working with AME sidesteps the problematic orthogonal assumptions on sources of mismatch in the previous studies. Matching efficiency and labor supply shocks, which capture potential variations in structural factors, are identified in a time‐varying structural vector autoregression. Empirical results suggest that the bulk of U.S. unemployment fluctuations is cyclical rather than structural. Meanwhile, the contribution of aggregate shocks to unemployment is substantially time‐varying. In particular, the surge of unemployment rate during the Great Recession is mainly resulting from a shortfall in aggregate demand.
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