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Implementing the Mortensen rule in a frictional labor market

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  • Julien, Benoit
  • Kennes, John
  • King, Ian Paul

Abstract

We show that, in settings where meetings can be multilateral, the allocation rule proposed by Mortensen (1982) can be relatively straightforward to implement: as a local auction conducted by sellers. The implications of using this mechanism in a simple model of the labor market are then explored. We characterize the equilibrium properties of this model, which include wage dispersion, and examine its implied Beveridge curve. A dynamic version of the model is calibrated to the US labor market, and we show that the model can account for observed vacancy rates, given parameters that are chosen to match the average wages and the natural rate of unemployment, although the implied wage dispersion is quite small. Finally, in the limit, as the time between offer rounds in the model approaches zero, the equilibrium approaches the Walrasian competitive equilibrium.

Suggested Citation

  • Julien, Benoit & Kennes, John & King, Ian Paul, 2011. "Implementing the Mortensen rule in a frictional labor market," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 80-91, March.
    • Handle: RePEc:eee:jmacro:v:33:y:2011:i:1:p:80-91
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    References listed on IDEAS

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    1. Peters, Michael, 2000. "Limits of Exact Equilibria for Capacity Constrained Sellers with Costly Search," Journal of Economic Theory, Elsevier, vol. 95(2), pages 139-168, December.
    2. Benoît Julien & John Kennes & Ian King, 2002. "Auctions Beat Posted Prices in a Small Market," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 158(4), pages 548-562, December.
    3. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
    4. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.),Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555, Elsevier.
    5. Arthur Sweetman & Peter Kuhn, 1998. "Unemployment Insurance and Quits in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 549-572, August.
    6. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
    7. Kultti, Klaus, 1999. "Equivalence of Auctions and Posted Prices," Games and Economic Behavior, Elsevier, vol. 27(1), pages 106-113, April.
    8. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2006. "Technical appendix for \\"Frictional wage dispersion in search models: a quantitative assessment\\"," Working Paper 06-08, Federal Reserve Bank of Richmond, revised 2006.
    9. Benoit Julien & John Kennes & Ian King, 2000. "Bidding for Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(4), pages 619-649, October.
    10. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    11. Peters, Michael & Severinov, Sergei, 1997. "Competition among Sellers Who Offer Auctions Instead of Prices," Journal of Economic Theory, Elsevier, vol. 75(1), pages 141-179, July.
    12. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2011. "Frictional Wage Dispersion in Search Models: A Quantitative Assessment," American Economic Review, American Economic Association, vol. 101(7), pages 2873-2898, December.
    13. Benoît Julien & John Kennes & Ian King, 2005. "Ex post bidding and efficient coordination unemployment," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 174-193, February.
    14. Julien Benoit & Kennes John & King Ian Paul, 2001. "Auctions and Posted Prices in Directed Search Equilibrium," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-16, July.
    15. Shi, Shouyong, 2001. "Frictional Assignment. I. Efficiency," Journal of Economic Theory, Elsevier, vol. 98(2), pages 232-260, June.
    16. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
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    Cited by:

    1. Lester, Benjamin & Visschers, Ludo & Wolthoff, Ronald, 2015. "Meeting technologies and optimal trading mechanisms in competitive search markets," Journal of Economic Theory, Elsevier, vol. 155(C), pages 1-15.
    2. Randall Wright & Philipp Kircher & Benoit Julîen & Veronica Guerrieri, 2017. "Directed Search: A Guided Tour," NBER Working Papers 23884, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Search Matching Unemployment theory;

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