Labor market matching and unemployment in urban China

In the traditional labor supply–demand approach, unemployment usually results from a lack of labor demand or excess of labor supply. However, in urban China, unemployment coexists with a conflicting phenomenon, shortage of workers in firms. In this study, we employ a novel approach to tackle this issue, search and matching theory, the empirical study of which has not drawn much attention in China. Our multiple model consisted of job-worker matching, job creation and destruction, rural–urban immigration and on-the-job search, and unemployment changes in China. We used non-linear estimation and the three-stage least squares analysis in this study. We found that matching efficiency declined greatly during the 1996–2008 period. The econometric model and simulation results indicated four key factors that led to changes in China's unemployment level: matching efficiency, job destruction, productivity growth, and job-search services. Finally, by using our econometric model, we identified the reasons for the shifts in the Beveridge curve.