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Diagnosing labor market search models: a multiple-shock approach

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Author Info
Kenneth Beauchemin
Murat Tasci
Abstract

We construct a multiple-shock version of the Mortensen-Pissarides labor market search model to investigate the basic model’s well-known tendency to underpredict 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. Although our multiple-shock model generates some more volatility, it has counterfactual implications for the cyclicality of unemployment and vacancies. Our second exercise forces the model to be the data-generating process to uncover the necessary realizations of all three shocks. We show that the Mortensen-Pissarides labor market search model requires significantly procyclical and volatile matching efficiency and job separations to simultaneously account for high procyclical variations in job-finding probabilities as well as relatively small net employment changes in the data. Hence, the model is more fundamentally flawed than its inability to amplify shocks would suggest. We also show that variation in job separations accounts for most of the employment fluctuations, suggesting that endogenous separations could be the key feature of an improved model. This leads us to conclude that the model lacks mechanisms to generate procyclical matching efficiency and labor force reallocation. As for the latter, we conjecture that nontrivial labor force participation and job-to-job transitions are promising avenues of research. Note: This paper is a revised version of an earlier working paper of the same title, WP 07-20.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0813.

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Date of creation: 2008
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Handle: RePEc:fip:fedcwp:0813

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Keywords: Labor market ; Business cycles;

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  1. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers iewwp351, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  2. Krause, Michael U. & Lubik, Thomas A., 2006. "The cyclical upgrading of labor and on-the-job search," Labour Economics, Elsevier, vol. 13(4), pages 459-477, August. [Downloadable!] (restricted)
  3. Wouter J. den Haan & Garey Ramey & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, vol. 90(3), pages 482-498, June. [Downloadable!] (restricted)
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  4. Dale Mortensen & Eva Nagypal, 2007. "More on Unemployment and Vacancy Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(3), pages 327-347, July. [Downloadable!] (restricted)
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  5. Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April. [Downloadable!] (restricted)
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  6. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2007. "Business Cycle Accounting," Econometrica, Econometric Society, vol. 75(3), pages 781-836, 05. [Downloadable!] (restricted)
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  7. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 61(3), pages 397-415, July. [Downloadable!] (restricted)
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  8. Bowlus, Audra J, 1995. "Matching Workers and Jobs: Cyclical Fluctuations in Match Quality," Journal of Labor Economics, University of Chicago Press, vol. 13(2), pages 335-50, April. [Downloadable!] (restricted)
  9. Merz, Monika, 1999. "Heterogeneous job-matches and the cyclical behavior of labor turnover," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 91-124, February. [Downloadable!] (restricted)
  10. Robert Shimer, 2004. "The Consequences of Rigid Wages in Search Models," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 469-479, 04/05. [Downloadable!] (restricted)
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  11. Ingram, Beth Fisher & Kocherlakota, Narayana R. & Savin, N. E., 1994. "Explaining business cycles: A multiple-shock approach," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 415-428, December. [Downloadable!] (restricted)
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  12. 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. [Downloadable!] (restricted)
  13. Davis, Steven J & Haltiwanger, John C, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 819-63, August. [Downloadable!] (restricted)
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  14. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March. [Downloadable!]
  15. Barbara Petrongolo & Christopher A. Pissarides, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June. [Downloadable!] (restricted)
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  16. Bruce Fallick & Charles A. Fleischman, 2004. "Employer-to-employer flows in the U.S. labor market: the complete picture of gross worker flows," Finance and Economics Discussion Series 2004-34, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  17. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March. [Downloadable!] (restricted)
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