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Unemployment, Participation and Market Size

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  • Godfrey Keller
  • Kevin Roberts
  • Margaret Stevens

Abstract

We construct an equilibrium random matching model of the labour market, with endogenous market participation and a general matching technology that allows for market size effects: the job-finding rate for workers and the incentives for participation change with the level of unemployment. In comparison to standard models with constant returns to scale in matching, agent behaviour is more complex - the model generates plausible joint dynamics of employment, unemployment and participation with heterogeneity in search behaviour for workers with different degrees of attachment to the labour market. Techniques are developed to reduce the dimensionality of the problem to establish local and global stability; a complicating factor is the possibility of multiple equilibria, welfare-ranked by market size. A Hosios-type condition internalises search externalities.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 362.

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Date of creation: 01 Oct 2007
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Handle: RePEc:oxf:wpaper:362

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Keywords: Unemployment; Participation; Job Search; Matching Function; Returns to Scale; Multiple Equilibria; Stability; Coordination; Search Externalities;

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  1. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  2. Peter Diamond & Drew Fudenberg, 1987. "Rational Expectations Business Cycles in Search Equilibrium," Working papers 465, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Shimer Robert & Smith Lones, 2001. "Matching, Search, and Heterogeneity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-18, April.
  4. Merz, Monika, 1999. "Heterogeneous job-matches and the cyclical behavior of labor turnover," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 91-124, February.
  5. 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.
  6. Howitt, Peter & McAfee, R Preston, 1987. "Costly Search and Recruiting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 89-107, February.
  7. Gerard J. van den Berg, 1999. "Multiple Equilibria and Minimum Wages in Labor Markets with Informational Frictions and Heterogeneous Production Technologies," Tinbergen Institute Discussion Papers 99-085/3, Tinbergen Institute.
  8. Acemoglu, Daron, 1997. "Technology, unemployment and efficiency," European Economic Review, Elsevier, vol. 41(3-5), pages 525-533, April.
  9. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Aki Kangasharju & Jaakko Pehkonen & Sari Pekkala, 2005. "Returns to scale in a matching model: evidence from disaggregated panel data," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 115-118.
  11. 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.
  12. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  13. repec:cup:macdyn:v:4:y:2000:i:3:p:289-323 is not listed on IDEAS
  14. Charles E. Hyde, 1997. "Multiple equilibria in bargaining models of decentralized trade (*)," Economic Theory, Springer, vol. 9(2), pages 283-307.
  15. Drazen, Allan, 1988. "Self-fulfilling Optimism in a Trade-Friction Model of the Business Cycle," American Economic Review, American Economic Association, vol. 78(2), pages 369-72, May.
  16. 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.
  17. Coles, Melvyn G & Smith, Eric, 1996. "Cross-Section Estimation of the Matching Function: Evidence from England and Wales," Economica, London School of Economics and Political Science, vol. 63(252), pages 589-97, November.
  18. Pissarides, Christopher A, 1984. "Search Intensity, Job Advertising, and Efficiency," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 128-43, January.
  19. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228 Elsevier.
  20. Camera, Gabriele, 2000. "Money, Search, And Costly Matchmaking," Macroeconomic Dynamics, Cambridge University Press, vol. 4(03), pages 289-323, September.
  21. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
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