Is There Compelling Evidence against Increasing Returns to Matching in the Labour Market?

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Is There Compelling Evidence against Increasing Returns to Matching in the Labour Market?

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Simon Baker
Seamus Hogan
Christopher Ragan

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Abstract

Matching models of the labour market have been of particular interest in macroeconomics where the notion of 'thick-market' externalities can lead to multiple equilibria. This has led to some recent interest in constructing empirical estimates of labor-market matching functions. This paper argues that existing estimates do not provide compelling evidence against the hypothesis of increasing returns in matching. The assumption made in several studies, that the relevant pool of job searchers is proportional to the stock of unemployment, is a potentially important source of downward bias in returns-to-scale estimates. We show the source of this bias theoretically and illustrate its magnitude by estimating Canadian aggregate and regional labour-market matching functions over the period 1978-88. This evidence suggests significant increasing returns to labor-market matching.

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Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 29 (1996)
Issue (Month): 4 (November)
Pages: 976-93
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Handle: RePEc:cje:issued:v:29:y:1996:i:4:p:976-93

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Howard J. Wall & Gylfi Zoega, 2001. "The British Beveridge curve: a tale of ten regions," Working Papers 2001-007, Federal Reserve Bank of St. Louis. [Downloadable!]
Other versions:
- Wall, Howard & Zoega, Gylfi, 1997. "The British Beveridge Curve: A Tale of Ten Regions," CEPR Discussion Papers 1771, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Wall, Howard J & Zoega, Gylfi, 2002. " The British Beveridge Curve: A Tale of Ten Regions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(3), pages 261-80, July. [Downloadable!] (restricted)
Elizabeth Webster & Lei Lei Song, 2001. "How Segmented Are Skilled and Unskilled Labour Markets: The Case of Beveridge Curves," Melbourne Institute Working Paper Series wp2001n14, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. [Downloadable!]
Other versions:
- Lei Lei Song & Elizabeth Webster, 2003. "How Segmented are Skilled and Unskilled Labour Markets: the Case of Beveridge Curves," Australian Economic Papers, Blackwell Publishing, vol. 42(3), pages 332-345, 09. [Downloadable!] (restricted)
Hartigh, E. den & Langerak, F. & Commandeur, H.R., 2000. "A Managerial Perspective on the Logic of Increasing Returns," Research Paper ERS-2000-48-MKT Revision_, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
Stefan Profit & Stefan Sperlich, 2004. "Non-uniformity of job-matching in a transition economy - A nonparametric analysis for the Czech Republic," Applied Economics, Taylor and Francis Journals, vol. 36(7), pages 695-714, April. [Downloadable!] (restricted)

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