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Diagnosing labor market search models: a multiple-shock approach

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  • Kenneth Beauchemin
  • Murat Tasci

Abstract

This paper constructs a multiple-shock version of the Mortensen-Pissarides labor market search model to investigate the basic model’s well-known tendency to under predict the volatility of key labor market variables. Data on U.S. job finding and job separation probabilities are used to help estimate the parameters of a three-dimensional shock process comprising labor productivity, job separation, and matching or ‘allocative’ efficiency. The authors show that the Mortensen-Pissarides labor market search model requires significantly procyclical and volatile job separations to simultaneously account for high procyclical variations in jobfinding probabilities as well as relatively small net employment changes. Hence, the model is more fundamentally flawed than its inability to amplify shocks would suggest. This leads the authors to conclude that the model lacks mechanisms to generate procyclical matching efficiency and labor force reallocation. As for the latter, the authors conjecture that nontrivial labor force participation and job-to-job transitions are promising avenues of research. ; This paper has been revised as WP 08-13, with the same title.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0720.

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Date of creation: 2007
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Handle: RePEc:fip:fedcwp:0720

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Keywords: Labor market ; Business cycles;

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References

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Citations

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Cited by:
  1. Kenneth Beauchemin & Murat Tasci, 2012. "Diagnosing labor market search models: a multiple-shock approach," Working Paper 1211, Federal Reserve Bank of Cleveland.
  2. Murat Tasci & Andrea Pescatori, 2011. "Search Frictions and the Labor Wedge," IMF Working Papers 11/117, International Monetary Fund.
  3. Francesco Furlanett & Nicolas Groshenny, 2012. "Matching efficiency and business cycle fluctuations," Reserve Bank of New Zealand Discussion Paper Series DP2012/06, Reserve Bank of New Zealand.
  4. Christopher Reicher, 2009. "What Can a New Keynesian Labor Matching Model Match?," Kiel Working Papers 1496, Kiel Institute for the World Economy.
  5. Mariya Mileva, 2013. "Optimal Monetary Policy in Response to Shifts in the Beveridge Curve," Kiel Working Papers 1823, Kiel Institute for the World Economy.

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