The Fundamental Surplus in Matching Models

To generate big responses of unemployment to productivity shocks in a business cycle context or to productivity changes in a welfare state context, researchers have reconfigured matching models in various ways, e.g., by elevating the utility of leisure, by making wages sticky, by assuming alternating-offer wage bargaining, by introducing fixed matching costs, and the costly acquisition of credit, or by positing government mandated unemployment benefits, layoff costs, and taxes. All of these redesigned matching models increase responses of unemployment to movements in productivity by operating through a common intermediating channel that we call the fundamental surplus fraction. The fundamental surplus fraction is an upper bound on the fraction of a job’s output that the invisible hand can allocate to vacancy creation. All reconfigured matching models generate large unemployment responses to movements in productivity by making the fundamental surplus fraction be small.