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The Unemployment Volatility Puzzle: The Role of Matching Costs Revisited

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  • Silva, José Ignacio
  • Toledo, Manuel

Abstract

Recently, Pissarides (2008) has argued that the standard search model with sunk fixed matching costs increases unemployment volatility without introducing an unrealistic wage response in new matches. We revise the role of matching costs and show that when these costs are not sunk and, therefore, can be partially passed on to new hired workers in the form of lower wages, the amplication mechanism of fixed matching costs is considerably reduced and wages in new hired positions become more sensitive to productivity shocks.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15695.

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Date of creation: 25 May 2009
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Handle: RePEc:pra:mprapa:15695

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Keywords: unemployment volatility puzzle; search and matching; matching costs;

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References

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  1. Christian Haefke & Marcus Sonntag & Thijs van Rens, 2006. "Wage Rigidity and Job Creation," 2006 Meeting Papers, Society for Economic Dynamics 773, Society for Economic Dynamics.
  2. Loewenstein, Mark A & Spletzer, James R, 1998. "Dividing the Costs and Returns to General Training," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 16(1), pages 142-71, January.
  3. Robert E. Hall & Paul R. Milgrom, 2005. "The Limited Influence of Unemployment on the Wage Bargain," NBER Working Papers 11245, National Bureau of Economic Research, Inc.
  4. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  5. Christopher A. Pissarides, 2007. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," CEP Discussion Papers dp0839, Centre for Economic Performance, LSE.
  6. 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.
  7. repec:eme:rlepps:v:18:y:1999:i:1999:p:281-302 is not listed on IDEAS
  8. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  9. Sarah Dolfin, 2006. "An examination of firms' employment costs," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 38(8), pages 861-878.
  10. John M. Barron & Mark C. Berger & Dan A. Black, 1997. "On-the-Job Training," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, W.E. Upjohn Institute for Employment Research, number ojt.
  11. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-90, September.
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Cited by:
  1. Ordóñez, Javier & Sala, Hector & Silva, José I., 2010. "Oil Price Shocks and Labor Market Fluctuations," IZA Discussion Papers 5096, Institute for the Study of Labor (IZA).
  2. Alejandro Justiniano & Claudio Michelacci, 2011. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the United States and Europe," NBER Chapters, in: NBER International Seminar on Macroeconomics 2011, pages 169-235 National Bureau of Economic Research, Inc.
  3. Zhen Huo & José-Víctor Ríos-Rull, 2013. "Paradox of Thrift Recessions," NBER Working Papers 19443, National Bureau of Economic Research, Inc.
  4. Miyamoto, Hiroaki, 2011. "Cyclical behavior of unemployment and job vacancies in Japan," Japan and the World Economy, Elsevier, vol. 23(3), pages 214-225.
  5. Zhen Huo & Jose-Victor Rios-Rull, 2012. "Engineering a paradox of thrift recession," Staff Report, Federal Reserve Bank of Minneapolis 478, Federal Reserve Bank of Minneapolis.
  6. Miyamoto, Hiroaki, 2011. "Efficiency in a search and matching model with training costs," Economic Modelling, Elsevier, vol. 28(4), pages 1838-1841, July.
  7. Victor Ortego-Marti, 2014. "The Cyclical Behavior of Unemployment and Vacancies with Loss of Skills during Unemployment," Working Papers 201416, University of California at Riverside, Department of Economics.
  8. Alejandro Justiniano & Claudio Michelacci, 2011. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the US and Europe," NBER Working Papers 17429, National Bureau of Economic Research, Inc.

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