Morning Must-Read: Pascal Michaillat and Emmanuel Saez: Unemployment, and Product and Labour-Market Tightness

…and simple enough to lend itself to pencil-and-paper analysis…. Michaillat and Saez (2014)… retains the architecture of the Barro-Grossman model but replaces the disequilibrium framework on the product and labour markets with an equilibrium matching framework…. Both meal prices and product market tightness can adjust to equilibrate supply and demand for meals…. Both wages and labour market tightness adjust to equilibrate labour supply and demand…. If product and labour market tightness remain constant, the equilibrium is reached by price adjustment…. If prices are rigid, the equilibrium is reached by adjustment of product and labour market tightness…. A negative labour demand shock leads to falls in both employment and labour market tightness…. A negative labour supply shock leads to a fall in employment but an increase in labour market tightness…. Output and product market tightness move in the same direction with demand shocks…. Output and product market tightness move in opposite direction with technology shocks…. Through the lens of our simple model, the empirical evidence suggests that price and real wage are somewhat rigid, and that unemployment fluctuations are mainly driven by aggregate demand shocks…