An estimated New-Keynesian model with unemployment as excess supply of labor

Wage stickiness is incorporated to a New-Keynesian model with variable capital to drive endogenous unemployment fluctuations defined as the log difference between aggregate labor supply and aggregate labor demand. We estimated such model using Bayesian econometric techniques and quarterly US data. The second-moment statistics of the unemployment rate in the model provide a reasonable fit to those observed in US data. Our results also show that mainly wage-push shocks together with demand shifts and monetary policy shocks are the major determinants of unemployment fluctuations. Compared to an estimated New-Keynesian model without unemployment (Smets and Wouters 2007): wage stickiness is higher, labor supply elasticity is lower, the slope of the New-Keynesian Phillips curve is flatter, and the importance of technology innovations on output variability increases.