Bounded rationality and unemployment dynamics

Using the bounded rationality implementation developed in Evans et al. (2021), we consider unemployment dynamics driven by aggregate productivity shocks within a McCall-type labor-search model. We find that bounded rationality magnifies the impact effect of a decline in productivity on unemployment. Boundedly rational agents are overly pessimistic about wage offers during the course of a recession, resulting in higher unemployment relative to the rational model.(c) 2021 Elsevier B.V. All rights reserved.