Recent research has reaffirmed that the prob? ability of an unemployed worker finding a job varies substantially over the business cycle. Robert E. Hall (2005, 101) concludes from his examination of a variety of data sources that Unemployment is high in a recession because jobs are hard to find, not because more job-seek? ers have been dumped into the labor market by elevated separation rates. Shimer (2007) shows that movements in the job finding probability account for three-quarters of the fluctuations in the unemployment rate in the United States during the postwar period, while movements in the exit rate from employment to unemployment account for the other quarter. Michael W. Elsby, Ryan Michaels, and Gary Solon (2007) argue that movements in the job finding probability accounted for about 65 percent of unemploy? ment fluctuations prior to the last two reces? sions, and more in 1990-1991 and 2001. Shigeru Fujita and Gary Ramey (2007) claim a more substantial role for the exit rate to unemploy? ment but still find that the job finding probabil? ity accounts for at least half of the fluctuations in unemployment. While it is theoretically convenient to discuss a single job finding probability for all workers, economists have long recognized that the job finding probability falls with unemployment duration (Hyman B. Kaitz 1970). This paper reexamines duration dependence and the cycli? cally of duration dependence in the job finding probability, both empirically and theoretically. To start, I develop a simple model with a single parameter that determines both how the job finding probability varies with unemployment duration and how it varies with aggregate eco? nomic conditions. The model's main departure from most existing research is to think of unemployed workers as waiting for labor mar? ket conditions to improve, rather than searching for job opportunities (Boyan Jovanovic 1987; Fernando Alvarez and Shimer 2007). They continuously compare their lifetime utility in the best available job with their lifetime utility if they remain unemployed. Individual / works if this difference, 8?(t), is positive at time t and not if it is negative. If S? is persistent, this leads to duration dependence in the hazard rate of exiting unemployment, since a newly unem? ployed worker is more likely to be near the threshold for taking a job than someone who is long term unemployed. The extent of dura? tion dependence is governed by the stochastic process for S?, which also determines how the average job finding probability varies with eco? nomic conditions.

This paper develops a dynamic model of mismatch. Workers and jobs are randomly allocated to labor markets. Each market clears, but some have excess (unemployed) workers and some have excess (vacant) jobs. As workers and jobs switch markets, unemployed workers find vacancies and employed workers become unemployed. The model is quantitatively consistent with the business cycle frequency comovement of unemployment, vacancies, and the job finding rate and explains much of these variables' volatility. It can also address cyclicality in the separation rate into unemployment and duration dependence in the job finding rate. The results are robust to some nonrandom mobility.

This paper argues that the textbook search and matching model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies in response to shocks of a plausible magnitude. In the United States, the standard deviation of the vacancy-unemployment ratio is almost 20 times as large as the standard deviation of average labor productivity, while the search model predicts that the two variables should have nearly the same volatility. A shock that changes average labor productivity primarily alters the present value of wages, generating only a small movement along a downward-sloping Beveridge curve (unemploymentvacancy locus). A shock to the separation rate generates a counterfactually positive correlation between unemployment and vacancies. In both cases, the model exhibits virtually no propagation.

We develop a dynamic equilibrium model of asset markets with adverse selection. There exists a unique equilibrium in which better quality assets trade at higher prices but with a lower price-dividend ratio in less liquid markets. Sellers of high-quality assets signal quality by accepting a lower trading probability. We show how the distribution of sellers' private information affects an asset's price and liquidity, how a change in that distribution can cause a fire sale and a flight to quality, and how asset purchase and subsidy programs may raise prices and liquidity and reverse the flight to quality.

We study unemployment insurance for workers who sequentially sample job opportunities. We focus on the optimal timing of benefits and the desirability of allowing borrowing and saving. When workers have constant absolute risk aversion, a simple policy is optimal: a constant benefit during unemployment, a constant tax during employment, and free access to a riskless asset. With constant relative risk aversion, optimal policy involves nearly constant benefits; more elaborate policies offer minuscule welfare gains. We highlight two distinct policy roles: ensuring workers have sufficient liquidity to smooth their consumption; and providing unemployment subsidies to insure against uncertain spell duration.

We develop a linear GMM estimator of the discrete-time mixed proportional hazard (MPH) model of duration with an arbitrary distribution of unobserved heterogeneity. We allow for competing risks, observable characteristics, and censoring. We prove our estimator is consistent and apply it to the duration of price spells. We find substantial unobserved heterogeneity with economically meaningful implications for the response of output to a monetary policy shock in a model with time-dependent pricing rules and for the degree of state dependence in a model of price plans.

Report: Ad Hoc Search Committee for the Editor of the American Economic Journal: Economic Policy by David Cutler, Amy Finkelstein, Adriana Lleras-Muney, James Poterba, David Romer and Robert Shimer. Published in volume 103, issue 3, pages 774 of American Economic Review, May 2013