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Skill mismatch in equilibrium unemployment

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  • Ronald Bachmann

Abstract

We analyse the effect of skill mismatch in a search model of equilibrium unemployment with risk-neutral agents, endogenous job destruction, and two-sided ex-ante heterogeneity. First, we examine the interaction of labour market institutions and skill mismatch. We find that skill mismatch changes the results obtained in a model with ex-ante homogeneity. Second, we analyse the interaction of skill mismatch and labour market institutions for the difference in the labour market experience of continental Europe on the one hand and the US on the other hand. We find that within-group skill mismatch cannot explain the rise in unemployment in Europe relative to the US. This result is due to the endogeneity of job destruction and stands at odds with previous findings in the literature. We can, however, confirm the fact that unemployment benefits potentially play a beneficial role by providing a subsidy to search. Generally, we argue that in search models with fixed match characteristics, job destruction should be endogenised in order to take account of heterogeneous decision rules.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2005-034.

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Length: 35 pages
Date of creation: Jun 2005
Date of revision: Aug 2005
Handle: RePEc:hum:wpaper:sfb649dp2005-034

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Keywords: Unemployment; mismatch; ex-ante heterogeneity; search; endogenous job destruction; Nash bargaining;

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  1. Barbara Petrongolo & Christopher Pissarides, 2000. "Looking into the black box: a survey of the matching function," LSE Research Online Documents on Economics 2122, London School of Economics and Political Science, LSE Library.
  2. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  3. Peter Gottschalk & Timothy M. Smeeding, 1997. "Cross-National Comparisons of Earnings and Income Inequality," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 633-687, June.
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  5. Blanchard, Olivier & Wolfers, Justin, 2000. "The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence," Economic Journal, Royal Economic Society, vol. 110(462), pages C1-33, March.
  6. Christian Haefke, 2001. "Shocks and institutions in a job matching model," Economics Working Papers 568, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2001.
  7. Shimer Robert & Smith Lones, 2001. "Matching, Search, and Heterogeneity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-18, April.
  8. Lars Ljungqvist & Thomas J. Sargent, 2004. "European Unemployment and Turbulence Revisited in a Matching Model," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 456-468, 04/05.
  9. Lars Ljungqvist & Thomas J. Sargent, 1996. "The European Unemployment Dilemma," EUI-RSCAS Working Papers 36, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
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  12. Dale T. Mortensen & Christopher A. Pissarides, 1999. "Job Reallocation, Employment Fluctuations and Unemployment," CEP Discussion Papers dp0421, Centre for Economic Performance, LSE.
  13. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, December.
  14. Ramon Marimon & Fabrizio Zilibotti, 1997. "Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits," NBER Working Papers 6038, National Bureau of Economic Research, Inc.
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