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Labor market heterogeneity and the aggregate matching function

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Abstract

The matching function -a key building block in models of labor market frictions- implies that the job finding rate depends only on labor market tightness. We estimate such a matching function and find that the relation, although remarkably stable over 1967-2007, broke down spectacularly after 2007. We argue that labor market heterogeneities are not fully captured by the standard matching function, but that a generalized matching function that explicitly takes into account worker heterogeneity and market segmentation is fully consistent with the behavior of the job finding rate. The standard matching function can break down when, as in the Great Recession, the average characteristics of the unemployed change too much, or when dispersion in labor market conditions -the extent to which some labor markets fare worse than others- increases too much.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1395.

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Date of creation: Oct 2010
Date of revision: Sep 2013
Handle: RePEc:upf:upfgen:1395

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Web page: http://www.econ.upf.edu/

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Keywords: job finding; aggregate; composition; dispersion;

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  1. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  2. Barbara Petrongolo, 1998. "Re-employment Probabilities and Returns to Matching," CEP Discussion Papers dp0406, Centre for Economic Performance, LSE.
  3. Carlos Carrillo-Tudela & Ludo Visschers, 2013. "Unemployment and endogenous reallocation over the business cycle," Economics Working Papers we1302, Universidad Carlos III, Departamento de Economía.
  4. Christopher J. Erceg & Andrew T. Levin, 2013. "Labor Force Participation and Monetary Policy in the Wake of the Great Recession," UTokyo Price Project Working Paper Series 009, University of Tokyo, Graduate School of Economics.
  5. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," Discussion Papers 07-006, Stanford Institute for Economic Policy Research.
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  8. Christian Merkl & Thijs van Rens, 2012. "Selective hiring and welfare analysis in labor market models," Working Papers 570, Barcelona Graduate School of Economics.
  9. Daniel Borowczyk-Martins & Gregory Jolivet & Fabien Postel-Vinay, 2013. "Accounting For Endogeneity in Matching Function Estimation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 440-451, July.
  10. Daniel Aaronson & Jonathan Davis & Luojia Hu, 2012. "Explaining the decline in the U.S. labor force participation rate," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Mar.
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  12. Abraham, Katharine G & Katz, Lawrence F, 1986. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 507-22, June.
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  14. Stephen W. Salant, 1974. "Search theory and duration data: a theory of sorts," Special Studies Papers 42, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Kory Kroft & Fabian Lange & Matthew J. Notowidigdo & Lawrence F. Katz, 2014. "Long-Term Unemployment and the Great Recession: The Role of Composition, Duration Dependence, and Non-Participation," NBER Working Papers 20273, National Bureau of Economic Research, Inc.
  2. Sedláček, Petr, 2014. "Match efficiency and firms' hiring standards," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 123-133.

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