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Island Matching

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  • Dale T. Mortensen

Abstract

A synthesis of the Lucas-Prescott island model and the Mortensen- Pissarides matching model of unemployment is studied. By assumption, all unmatched workers and jobs are randomly assigned to islands at the beginning of each period and the number of matches that form on a particular island is the minimum of the two realizations. When calibrated to the recently observed averages of U.S. unemployment and vacancy rates, the model fits the observed vacancy-unemployment Beveridge relationship very well and implies an implicit log linear relationship between the job finding rate and the vacancy-unemployment relationship with an elasticity near 0.5. The constrained efficient solution to the model is decentralized by a equilibrium outcome in which wages on each island are determined by a modified auction. Although the efficient solution explains only about 25% of the observed volatility in the U.S. vacancy-unemployment ratio, an equilibrium outcome in which wages are determined as the solution to a strategic bargaining game explains almost all of it.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13287.

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Date of creation: Aug 2007
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Publication status: published as Mortensen, Dale T., 2009. "Island matching," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2336-2353, November.
Handle: RePEc:nbr:nberwo:13287

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  1. Christopher A. Pissarides & Barbara Petrongolo, 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.
  2. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-79, December.
  3. Robert E. Hall & Paul R. Milgrom, 2007. "The Limited Influence of Unemployment on the Wage Bargain," Levine's Bibliography 321307000000000135, UCLA Department of Economics.
  4. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  5. Dale T. Mortensen & Randall Wright, 2002. "Competitive Pricing and Efficiency in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 1-20, February.
  6. Hagedorn, Marcus & Manovskii, Iourii, 2008. "The cyclical behavior of equilibrium unemployment and vacancies revisited," Working Paper Series 0853, European Central Bank.
  7. Julien, Benoit & Kennes, John & King, Ian, 2006. "The Mortensen rule and efficient coordination unemployment," Economics Letters, Elsevier, vol. 90(2), pages 149-155, February.
  8. Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(2), pages 217-27, April.
  9. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
  10. Diamond, Peter & Fudenberg, Drew, 1989. "Rational Expectations Business Cycles in Search Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(3), pages 606-19, June.
  11. Mortensen, Dale T, 1999. "Equilibrium Unemployment Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 889-914, November.
  12. Dale T. Mortensen & Eva Nagypal, 2005. "More on Unemployment and Vacancy Fluctuations," NBER Working Papers 11692, National Bureau of Economic Research, Inc.
  13. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
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Cited by:
  1. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2235-2246, November.
  2. Longhi, Simonetta, 2010. "Job Competition and the Wage Curve," IZA Discussion Papers 4777, Institute for the Study of Labor (IZA).
  3. Carlos Usabiaga & Fernando Núñez & Pablo Álvarez de Toledo, 2013. "Segmentación del mercado de trabajo, clusters, movilidad y duración de desempleo con datos individuales," Economic Working Papers at Centro de Estudios Andaluces E2013/02, Centro de Estudios Andaluces.
  4. Carlos Carrillo-Tudela & Ludo Visschers, 2014. "Unemployment and Endogenous Reallocation over the Business Cycle," Economics Working Papers we1410, Universidad Carlos III, Departamento de Economía.
  5. Benoit Julien & John Kennes & Moritz Ritter, 2013. "Bidding for Clubs," Economics Working Papers, School of Economics and Management, University of Aarhus 2013-19, School of Economics and Management, University of Aarhus.
  6. Kaas, Leo, 2008. "Variable Search Intensity in an Economy with Coordination Unemployment," IZA Discussion Papers 3697, Institute for the Study of Labor (IZA).
  7. Álvarez de Toledo, Pablo & Núñez, Fernando & Usabiaga, Carlos, 2013. "Labour Market Segmentation, Clusters, Mobility and Unemployment Duration with Individual Microdata," MPRA Paper 46003, University Library of Munich, Germany.
  8. Bauer, Anja, 2013. "Mismatch unemployment : evidence from Germany 2000-2010," IAB Discussion Paper 201310, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  9. Moritz Ritter & John Kennes & Benoit Julien, 2013. "Bidding for Teams," 2013 Meeting Papers, Society for Economic Dynamics 989, Society for Economic Dynamics.
  10. Álvarez de Toledo, Pablo & Núñez, Fernando & Usabiaga, Carlos, 2014. "An empirical approach on labour segmentation. Applications with individual duration data," Economic Modelling, Elsevier, vol. 36(C), pages 252-267.

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