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The Cyclicality of Search Intensity in a Competitive Search Model

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Abstract

Reasonably calibrated versions of the Diamond-Mortensen-Pissarides search and matching model of unemployment underpredict, by a wide margin, the volatility of vacancies, unemployment, and the vacancies-unemployment ratio - variables at the heart of this model. These shortcomings motivate two modifications to the Diamond-Mortensen-Pissarides model. First, wages are determined via competitive search (wage posting by firms along with directed search on the part of workers) rather than the usual Nash bargaining. This change is motivated by the fact that most unemployment variation in the U.S. is due to non-college educated individuals, and that wages of newly-hired non-college educated workers are predominantly set by wage posting. Second, workers are permitted to take direct action to affect the outcome of their labor market search through search effort. With these modifications in place, the benchmark model captures 70% of the standard deviation of unemployment and the vacancies-unemployment ratio, and almost 80% of the volatility of vacancies. A recalibration of the model that targets the variability of the vacancies-unemployment ratio results in reasonable parameters, and can account for almost all of the cyclical variability in unemployment and vacancies.

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File URL: http://alcor.concordia.ca/~pgomme/search-cycle-2012-06-18.pdf
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Bibliographic Info

Paper provided by Concordia University, Department of Economics in its series Working Papers with number 11003.

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Length: 30 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:crd:wpaper:11003

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Keywords: Variable Search Effort; Educational Differences in Unemployment Volatility; Endogenous Matching Technology; Time Use; Wage Posting; Competitive Search;

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  1. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
  2. Mortensen, Dale T. & Nagypál, Éva, 2005. "More on Unemployment and Vacancy Fluctuations," IZA Discussion Papers 1765, Institute for the Study of Labor (IZA).
  3. Robert E. Hall & Alan B. Krueger, 2010. "Evidence on the Determinants of the Choice between Wage Posting and Wage Bargaining," NBER Working Papers 16033, National Bureau of Economic Research, Inc.
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  5. Mark Bils & Yongsung Chang & Sun-Bin Kim, 2011. "Worker Heterogeneity and Endogenous Separations in a Matching Model of Unemployment Fluctuations," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 128-54, January.
  6. Alan B. Krueger & Andreas Mueller, 2008. "Job Search and Unemployment Insurance: New Evidence from Time Use Data," Working Papers 1070, Princeton University, Department of Economics, Industrial Relations Section..
  7. Barbara Petrongolo & Christopher A. Pissarides, 2000. "Looking Into the Black Box: A Survey of the Matching Function," CEP Discussion Papers dp0470, Centre for Economic Performance, LSE.
  8. Simon Burgess & Helene Turon, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies – A Comment," Bristol Economics Discussion Papers 05/573, Department of Economics, University of Bristol, UK.
  9. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  10. Marcelo Veracierto, 2009. "Establishments dynamics, vacancies and unemployment: a neoclassical synthesis," Working Paper Series WP-09-14, Federal Reserve Bank of Chicago.
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  13. Leo Kaas, 2010. "Variable Search Intensity with Coordination Unemployment," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 31.
  14. repec:aea:jeclit:v:43:y:2005:i:4:p:959-988 is not listed on IDEAS
  15. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
  16. Lkhagvasuren, Damba & Galindev, Ragchaasuren, 2008. "Discretization of highly persistent correlated AR(1) shocks," MPRA Paper 22523, University Library of Munich, Germany.
  17. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
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