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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, discrete time 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. In addition to the standard labor productivity shock, we introduce shocks to matching effi ciency and job separation. We conduct two set of experiments. First, we estimate the joint probability distribution of shocks that simultaneously satisfy the observed data and the fi rst-order conditions of the multiple-shock model, and then simulate its properties. Although the multiple-shock model generates significantly more volatility while preserving the Beveridge curve relationship, it generates counterfactual implications for the cyclicality of job separations. Using a business cycle accounting approach, we design the second set of experiments to isolate the sources of model incompleteness and show that the model requires significant procyclical and volatile matching efficiency and counterfactually procyclical job separations to render the observed data without error. We conjecture that the basic Mortensen-Pissarides model lacks mechanisms to generate sufficiently strong labor market reallocation over the business cycle, and suggest nontrivial labor force participation and job-to-job transitions as promising avenues of research.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1211.

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Date of creation: 2012
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Handle: RePEc:fip:fedcwp:1211

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Keywords: Employment ; Labor market ; Labor turnover;

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Citations

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Cited by:
  1. Francesco Furlanetto & Nicolas Groshenny, 2012. "Matching efficiency and business cycle fluctuations," Working Paper, Norges Bank 2012/07, Norges Bank.
  2. Christopher Reicher, 2009. "What Can a New Keynesian Labor Matching Model Match?," Kiel Working Papers 1496, Kiel Institute for the World Economy.
  3. Kenneth Beauchemin & Murat Tasci, 2008. "Diagnosing labor market search models: a multiple-shock approach," Working Paper 0813, Federal Reserve Bank of Cleveland.
  4. Andrea Pescatori & Murat Tasci, 2011. "Search frictions and the labor wedge," Working Paper 1111, Federal Reserve Bank of Cleveland.
  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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