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Diagnosing labor market search models: a multiple-shock approach

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  • 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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Bibliographic Info

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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References

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  4. Cole, Harold L & Rogerson, Richard, 1999. "Can the Mortensen-Pissarides Matching Model Match the Business-Cycle Facts?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 933-59, November.
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Citations

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Cited by:
  1. Andrea Pescatori & Murat Tasci, 2011. "Search Frictions and the Labor Wedge," Koç University-TUSIAD Economic Research Forum Working Papers 1113, Koc University-TUSIAD Economic Research Forum.
  2. Kenneth Beauchemin & Murat Tasci, 2007. "Diagnosing labor market search models: a multiple-shock approach," Working Paper 0720, Federal Reserve Bank of Cleveland.
  3. Christopher Reicher, 2009. "What Can a New Keynesian Labor Matching Model Match?," Kiel Working Papers 1496, Kiel Institute for the World Economy.
  4. Francesco Furlanetto & Nicolas Groshenny, 2012. "Matching efficiency and business cycle fluctuations," Working Paper 2012/07, Norges Bank.
  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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