Nicolas Petrosky-Nadeau

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Nicolas Petrosky-Nadeau

Vice President
Macroeconomic Research
Macroeconomics, Labor, Business cycles

Nicolas.Petrosky-Nadeau (at)

Profiles: Google Scholar | Personal website

Working Papers
Estimating Natural Rates of Unemployment: A Primer

2023-25 | with Bok, Crump, and Nekarda | August 2023


Before the pandemic, the U.S. unemployment rate reached a historic low that was close to estimates of its underlying longer-run value and the short-run level associated with an absence of inflationary pressures. After two turbulent years, unemployment returned to its pre-pandemic low, and the estimated underlying longer-run unemployment rate appeared largely unchanged. However, economic disruptions pushed up the short-run noninflationary rate substantially, as high as 6%. This primer examines these different measures of the natural rate of unemployment and discusses how they can provide useful insights for policymakers.

From Deviations to Shortfalls: The Effects of the FOMC’s New Employment Objective

2021-18 | with Bundick | July 2021


The Federal Open Market Committee (FOMC) recently revised its interpretation of its maximum employment mandate. In this paper, we analyze the possible effects of this policy change using a theoretical model with frictional labor markets and nominal rigidities. A monetary policy which stabilizes “shortfalls” rather than “deviations” of employment from its maximum level leads to higher inflation and more hiring at all times due to expectations of more accommodative future policy. Thus, offsetting only shortfalls of employment results in higher nominal policy rates on average which provide more policy space and better outcomes during a zero lower bound episode. Our model suggests that the FOMC’s reinterpretation of its employment mandate could alter the business-cycle and longer-run properties of the economy and result in a steeper reduced-form Phillips curve.

Parents in a Pandemic Labor Market

2021-04 | with Lofton and Seitelman | February 2021


Gender gaps in labor market outcomes during the pandemic are largely due to differences across parents: Employment and labor force participation fell much less for fathers as compared to women and non-parent men at the onset of the pandemic; the recovery has been more pronounced for men and women without children, and; the labor force participation rate of mothers has resumed declining following the start of the school year. The latter is partially offset in states with limited school re-openings. Evidence suggests flexibility in setting work schedules offsets some of the adverse impact of the pandemic on mothers’ employment, while the ability to work from home does not.

Reservation Benefits: Assessing Job Acceptance Impacts of Increased UI Payments

2020-28 | August 2020


Job acceptance decisions weigh the value of a job against remaining unemployed. A reservation level of benefit payments exists in this dynamic decision problem at which an individual is indifferent between accepting and refusing an offer. This reservation benefit is a simple statistic summarizing the decision problem conditional on the believed state of the labor market and the weeks of Unemployment Insurance (UI) compensation remaining. Estimating the reservation benefit for a wide range of US workers suggests few would turn down an offer to return to work at the previous wage under the CARES Act expanded UI payments.

Unemployment Paths in a Pandemic Economy

2020-18 | with Valletta | September 2020


The COVID-19 pandemic upended the U.S. economy and labor market. We explore potential paths for the official unemployment rate through 2021. Our analyses rely on historical patterns of monthly flows in and out of unemployment, adjusted for unique features of the virus economy. The possible unemployment trajectories vary widely, but absent sustained hiring activity on an unprecedented scale, unemployment could remain substantially elevated into 2021. After adjusting the unemployment rate for unique measurement challenges created by virus containment measures, we find that unemployment has followed a fast recovery track during the first six months of the pandemic.

When Hosios Meets Phillips: Connecting Efficiency and Stability to Demand Shocks

2018-13 | with Wasmer and Weil | February 2021


In an economy with frictional goods and labor markets there exist a price and a wage that implement the constrained efficient allocation. This price maximizes the marginal revenue of labor, balancing a price and a trading effect on firm revenue, and this wage trades off the benefits of job creation against the cost of turnover in the labor market. We show under bargaining over prices and wages that a double Hosios condition: (i) implements the constrained efficient allocation; (ii) also minimizes the elasticity of labor market tightness and job creation to a demand shock, and; (iii) that the relative response of wages to that of unemployment to changes in demand flattens as workers lose bargaining power, and it is steepest when there is efficient rent sharing in the goods market between consumers and producers, thereby relating changes in the slope of a wage Phillips curve to the constrained efficiency of allocations.

Published Articles (Refereed Journals and Volumes)
UI Generosity and Job Acceptance: Effects of the 2020 CARES Act

Forthcoming in Journal of Political Economy Macroeconomics | with Valletta


We assess labor market effects of the CARES Act $600 UI supplement. We start with direct empirical analyses of labor force transitions using monthly CPS data and imputed UI benefits. The results show moderate disincentive effects of the supplement on job finding. We rationalize this result in a dynamic model of job acceptance decisions that yields a reservation level of UI benefits at which a recipient is indifferent between unemployment and employment at their prior wage. Calculations based on the model confirm that only a small fraction of recipients of the enhanced UI benefits were likely to reject job offers.

Unemployment Crises

Journal of Monetary Economics 117, January 2021, 335-353 | with Zhang


An equilibrium search model with credible bargaining, when calibrated to the mean and volatility of postwar unemployment rates, is a good start to understanding the unemployment crisis in the Great Depression. Drawing from rarely used data sources, this paper compiles historical monthly time series of U.S. unemployment rates, vacancy rates, and labor productivity, some of which date back to 1890. The frequency, persistence, and severity of the unemployment crises in the model are quantitatively consistent with those in the historical data.

Replicating and Projecting the Path of COVID-19 with a Model-Implied Reproduction Number

Infectious Disease Modelling 5, 2020, 635-651 | with Buckman, Glick, Lansing, and Seitelman


We demonstrate a methodology for replicating and projecting the path of COVID-19 using a simple epidemiology model. We fit the model to daily data on the number of infected cases in China, Italy, the United States, and Brazil. These four countries can be viewed as representing different stages, from later to earlier, of a COVID-19 epidemic cycle. We solve for a model-implied effective reproduction number Rt each day so that the model closely replicates the daily number of currently infected cases in each country. For out-of-sample projections, we fit a behavioral function to the in-sample data that allows for the endogenous response of Rt to movements in the lagged number of infected cases. We show that declines in measures of population mobility tend to precede declines in the model-implied reproduction numbers for each country. This pattern suggests that mandatory and voluntary stay-at-home behavior and social distancing during the early stages of the epidemic worked to reduce the effective reproduction number and mitigate the spread of COVID-19.

Endogenous Disasters

American Economc Review 108(8), August 2018, 2212-2245 | with Zhang and Kuehn


Market economies are intrinsically unstable. The standard search model of equilibrium unemployment, once solved accurately with a globally nonlinear algorithm, gives rise endogenously to rare disasters. Intuitively, in the presence of cumulatively large negative shocks, inertial wages remain relatively high, and reduce profits. The marginal costs of hiring run into downward rigidity, which stems from the trading externality of the matching process, and fail to decline relative to profits. Inertial wages and rigid hiring costs combine to stifle job creation flows, depressing the economy into disasters. The disaster dynamics are robust to extensions to home production, capital accumulation, and recursive utility.

Disentangling Goods, Labor, and Credit Market Frictions in Three European Economies

Labour Economics 50, March 2018, 180-196 | with Brzustowski and Wasmer


We build a flexible model with search frictions in three markets: credit, labor, and goods markets. We then apply this model (called CLG) to three different economies: a flexible, finance-driven economy (the UK), an economy with wage moderation (Germany), and an economy with structural rigidities (Spain). In the three countries, goods and credit market frictions play a dominant role in entry costs and account for 75% to 85% of total entry costs. In the goods market, adverse supply shocks are amplified through their propagation to the demand side, as they also imply income losses for consumers. This adds up to, at most, an additional 15% to 25% to the impact of the shocks. Finally, the speed of matching in the goods market and the credit market accounts for a small fraction of unemployment: Most of the variation in unemployment comes from the speed of matching in the labor market.

Solving the Diamond-Mortensen-Pissarides Model Accurately

Quantitative Economics 8(2), July 2017, 611-650 | with Zhang


An accurate global projection algorithm is critical for quantifying the basic moments of the Diamond-Mortensen-Pissarides model. Log linearization understates the mean and volatility of unemployment, but overstates the volatility of labor market tightness and the magnitude of the unemployment–vacancy correlation. Log linearization also understates the impulse responses in unemployment in recessions, but overstates the responses in the market tightness in booms. Finally, the second-order perturbation in logs can induce severe Euler equation errors, which are often much larger than those from log linearization.

Financial Frictions, the Housing Market, and Unemployment

Journal of Economic Theory 164, July 2016, 101-135 | with Branch and Rocheteau


We develop a two-sector search-matching model of the labor market with imperfect mobility of workers, augmented to incorporate a housing market and a frictional goods market. Homeowners use home equity as collateral to finance idiosyncratic consumption opportunities. A financial innovation that raises the acceptability of homes as collateral raises house prices and reduces unemployment. It also triggers a reallocation of workers, with the direction of the change depending on firms’ market power in the goods market. A calibrated version of the model under adaptive learning can account for house prices, sectoral labor flows, and unemployment rate changes over 1996–2010.

Shopping Time

Economics Letters 143, June 2016, 52-60 | with Wasmer and Zeng


The renewal of interest in macroeconomic theories of search frictions in the goods market requires a deeper understanding of the cyclical properties of the intensive margins in this market. We review the theoretical mechanisms that promote either procyclical or countercyclical movements in time spent searching for consumer goods and services, and then use the American Time Use Survey to measure shopping time through the Great Recession. Average time spent searching declined in the aggregate over the period 2008-2010 compared to 2005-2007, and the decline was largest for the unemployed who went from spending more to less time searching for goods than the employed. Cross-state regressions point towards a procyclicality of consumer search in the goods market. At the individual level, time allocated to different shopping activities is increasing in individual and household income. Overall, this body of evidence supports procyclical consumer search effort in the goods market and a conclusion that price comparisons cannot be a driver of business cycles.

Macroeconomic Dynamics in a Model of Goods, Labor and Credit Market Frictions

Journal of Monetary Economics 72, May 2015, 97-113 | with Wasmer


Goods market frictions drastically change the dynamics of the labor market, both in terms of persistence and volatility. In a model with three imperfect markets – goods, labor, and credit – we find that credit and goods market imperfections are substitutable in raising volatility. Goods market frictions are unique in generating persistence. Two key mechanisms in the goods market generate large hump-shaped responses to productivity shocks: countercyclical goods market tightness and prices alter future profit flows and raise persistence; procyclical search effort of consumers and firms raises amplification. Goods market frictions are thus key in understanding labor market dynamics.

Credit, Vacancies and Unemployment Fluctuations

Review of Economic Dynamics 17(2), April 2014, lead article


Propagation in equilibrium models of search unemployment is altered when vacancy costs require some external financing on frictional credit markets. The easing of financing constraints during an expansion as firms accumulate net worth reduces the opportunity cost for resources allocated to job creation. The dynamics of market tightness are affected by (i) a cost channel, increasing the incentive to recruit for a given benefit from a new hire, and (ii) a wage channel, whereby firms’ improved bargaining position limits the upward pressure of market tightness on wages. Agency related credit frictions endogenously generate persistence in the dynamics of labor-market tightness, and have a moderate endogenous effect on amplification.

TFP During a Credit Crunch

Journal of Economic Theory 148(3), May 2013, 1150-1178


The financial crisis of 2008 was followed by sharp contractions in aggregate output and The financial crisis of 2008 was followed by sharp contractions in aggregate output and employment and an unusual increase in aggregate total factor productivity (TFP). This paper attempts to explain these facts by modeling the creation and destruction of jobs in the presence of heterogeneity in firm productivity and frictional credit and labor markets. The aggregate level of TFP is determined by both the underlying distribution of firm productivity and the structures of the credit and labor markets. Adverse shocks to credit markets destroy the least productive jobs and slow job creation, thus raising aggregate TFP and unemployment, and reducing output.

The Cyclical Volatility of Labor Markets under Frictional Financial Market

American Economic Journal: Macroeconomics 5(1), January 2013, 193-221 | with Wasmer


We provide a dynamic extension of an economy with search on credit and labor markets (Wasmer and Weil, 2004). Financial frictions create volatility: they add an additional, almost acyclical, entry cost to procyclical job creation costs, thus increasing the elasticity of labor market tightness to productivity shocks by a factor of 5 to 8, compared to a matching economy with perfect financial markets. We characterize a dynamic financial multiplier, that is increasing in total financial costs and minimized under a credit market Hosios-Pissarides rule. Financial frictions are an element of the solution to the volatility puzzle.

FRBSF Publications
To Retire or Keep Working after a Pandemic?

Economic Letter 2024-08 | March 25, 2024 | with Miskanic and Zhao

Staying on Course: Reducing Inflation along a Nonlinear Phillips Curve

SF Fed Blog | Feb 2024 | with Lansing

Reducing Inflation along a Nonlinear Phillips Curve

Economic Letter 2023-17 | July 10, 2023 | with Crust and Lansing

Finding a Soft Landing along the Beveridge Curve

Economic Letter 2022-24 | August 29, 2022 | with Bok, Valletta, and Yilma

Estimating Natural Rates of Unemployment

Economic Letter 2022-14 | May 31, 2022 | with Bok

Unemployment Insurance Withdrawal

Economic Letter 2022-09 | April 11, 2022 | with Albert, Lofton, and Valletta

Mothers in a Pandemic Labor Market

SF Fed Blog | 2021 | with Lofton and Seitelman

Parental Participation in a Pandemic Labor Market

Economic Letter 2021-10 | April 5, 2021 | with Lofton and Seitelman

Contrasting U.S. and European Job Markets during COVID-19

Economic Letter 2021-05 | February 22, 2021 | with Eyméoud, Santaeulàlia-Llopis, and Wasmer

Did the $600 Unemployment Supplement Discourage Work?

Economic Letter 2020-28 | September 21, 2020 | with Valletta

Did Increased Unemployment Payments Cause People to Reject Job Offers?

SF Fed Blog | 2020

An Unemployment Crisis after the Onset of COVID-19

Economic Letter 2020-12 | May 18, 2020 | with Valletta

Unemployment: Lower for Longer?

Economic Letter 2019-21 | August 19, 2019 | with Valletta

Why Aren’t U.S. Workers Working?

Economic Letter 2018-24 | November 13, 2018 | with Daly, Pedtke, and Schweinert

Job-to-Job Transitions in an Evolving Labor Market

Economic Letter 2016-34 | November 14, 2016 | with Bosler

Changes in Labor Participation and Household Income

Economic Letter 2016-02 | February 1, 2016 | with Hall

Other Works
Discussion of “Liquidity Provision, Interest Rates, and Unemployment,” by G. Rocheteau

Journal of Monetary Economics, Fall 2013