UCLA

This dissertation explores persistent unemployment dynamics in the U.S., alternative explanations for this phenomenon and potential policy implications. Chapter 1 develops and estimates a general equilibrium rational expectations model with search and multiple equilibria where aggregate shocks have a permanent effect on the unemployment rate. If agents' wealth decreases, the unemployment rate increases for a potentially indefinite period. This makes unemployment rate dynamics path dependent as in Blanchard and Summers (1987). I argue that this feature explains the persistence of the unemployment rate in the U.S. after the Great Recession and over the entire postwar period.

Chapter 2 conducts an empirical exercise to analyze which assumptions prevent a standard model from matching the persistence of the unemployment rate. I do this by using business cycle accounting procedure (Chari et. al. (2007)) on data in wage units (Farmer (2010)). I find that most movements in the unemployment rate are accounted for by the labor supply wedge. In other words, a standard model fits data badly because the assumption that households are on their labor supply is flawed. This finding is consistent with other papers in the literature. It also motivates assumptions that I make in my job market paper.

In Chapter 3, I with Roger Farmer focus on the persistent unemployment dynamics during the Great Depression. We explain the period between 1929 and 1950 within a single model which

is driven by the stock market as a measure of consumer confidence. We document that the stock market measured by the S&P 500 and unemployment were moving closely between 1929 and 1939, but after 1939 the relationship between the two series seems to completely disappear. In particular, the stock market kept falling, but the employment rate recovered to the pre-recession level by 1942. Using our model we analytically study the effects of temporary bond-financed fiscal expansions that are similar to the actual data. We plug the actual data for the stock market and government expenditures from the Great Depression and WWII in the model and show that the model does a good job replicating consumption and unemployment dynamics during this period.