Declining search frictions, unemployment and self-employment

Abstract

Abstract In most OECD countries, unemployment rates show no trend, which is puzzling if advancements in ICT decrease labour market frictions. We show, both analytically and quantitatively, that accounting for the secular decline in self-employment rates solves the puzzle. While declining labour market frictions can theoretically explain these trends, we provide contradictory causal evidence that the rollout of broadband Internet increased self-employment and decreased unemployment rates. We reconcile these observations with a new model featuring frictions in both labour and goods markets. We explain falling self-employment and non-trending unemployment quantitatively by labour market frictions declining relatively more than goods market frictions.