Business Cycles, Unemployment Insurance, and the Calibration of Matching Models

This paper points out an empirical puzzle that arises when an RBC economy with a job matching function is used to model unemployment. The standard model can generate sufficiently large cyclical fluctuations in unemployment, or a sufficiently small response of unemployment to labor market policies, but it cannot do both. Variable search and separation, finite UI benefit duration, efficiency wages, and capital all fail to resolve this puzzle. However, both sticky wages and match-specific productivity shocks help the model reproduce the stylized facts: both make the firm's flow of surplus more procyclical, thus making hiring more procyclical too.