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Two-Sided Search, Heterogeneous Skills and Labor Market Performance

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  • Danthine, Samuel

    ()
    (University of Québec at Montréal)

Abstract

A quantitative model of two-sided search with ex-ante heterogeneity in both worker and entrepreneurial skills is proposed. It is possible to characterize both the competitive equilibrium and the optimal solution numerically. The competitive equilibrium is shown to be suboptimal. Less-skilled workers and firms are too selective, not matching with their comparable counterparts. High-types, on the other hand, are not selective enough. The model shows promise as a tool for evaluating the effects of labor policies (and other changes in the economy) on the composition of unemployment and on unemployment duration, as well as on wage distributions. The effect of introducing a simple unemployment insurance scheme is then twofold. First, it increases unemployment by allowing a greater proportion of low types not to match, which decreases output. Second, it decreases mismatch, which has a positive effect on output. It is possible to have a positive effect of unemployment insurance on productivity and find the optimal level of unemployment insurance. Finally, it is shown that assuming risk-neutral workers in this model is not innocuous.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1572.

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Length: 45 pages
Date of creation: Apr 2005
Date of revision:
Handle: RePEc:iza:izadps:dp1572

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Keywords: two-sided search; heterogeneity; unemployment; unemployment insurance; risk aversion;

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References

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  1. James Albrecht & Susan Vroman, 2000. "A Matching Model with Endogenous Skill Requirements," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0774, Econometric Society.
  2. S. Rao Aiyagari & Jeremy Greenwood & Nezih Guner, 2000. "On the State of the Union," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(2), pages 213-244, April.
  3. Steven J. Davis, 2001. "The Quality Distribution of Jobs and the Structure of Wages in Search Equilibrium," NBER Working Papers, National Bureau of Economic Research, Inc 8434, National Bureau of Economic Research, Inc.
  4. Jeremy Greenwood & Nezih Guner & John Knowles, . "More on Marriage, Fertility, and the Distribution of Inocome," Penn CARESS Working Papers, Penn Economics Department 65f9ffed93b3a872de23c94c2, Penn Economics Department.
  5. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, Elsevier, vol. 98(2), pages 232-260, June.
  6. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  7. Vroman, Susan B., 1987. "Behavior of the firm in a market for heterogeneous labor," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 11(3), pages 313-329, September.
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Citations

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Cited by:
  1. Auray, Stéphane & Danthine, Samuel, 2005. "Bargaining Frictions and Hours Worked," IZA Discussion Papers, Institute for the Study of Labor (IZA) 1722, Institute for the Study of Labor (IZA).
  2. Stéphane Auray & Samuel Danthine, 2008. "Bargaining Frictions, Labor Income Taxation and Economic Performance," Working Papers, Universidad de Málaga, Department of Economic Theory, Málaga Economic Theory Research Center 2008-1, Universidad de Málaga, Department of Economic Theory, Málaga Economic Theory Research Center.
  3. Frank Oskamp & Dennis J. Snower, 2007. "Interactions between Employment and Training Policies," Kiel Working Papers, Kiel Institute for the World Economy 1389, Kiel Institute for the World Economy.
  4. Frank Oskamp & Dennis J. Snower, 2006. "The Effect of Low-Wage Subsidies on Skills and Employment," Kiel Working Papers, Kiel Institute for the World Economy 1292, Kiel Institute for the World Economy.
  5. Blázquez, Maite & Jansen, Marcel, 2008. "Search, mismatch and unemployment," European Economic Review, Elsevier, Elsevier, vol. 52(3), pages 498-526, April.

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