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Ranking, Unemployment Duration, and Wages

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  • Olivier Jean Blanchard
  • Peter Diamond

Abstract

The paper examines the effects of the composition of unemployment on wage determination. It explores the implication of one central assumption: when firms receive multiple acceptable applications, they hire the worker who has been unemployed for the least amount of time. This assumption ("ranking") is contrasted with the assumption of random hiring ("no-ranking"). By embodying this assumption in a model of the labour market with job creation/destruction and matching, the joint behaviour of unemployment, the distribution of unemployment durations, and wages are characterized. The implication that the re-employment prospects of employed workers, were they to become unemployed, are better than those of the currently unemployed appears to have been an important feature of European unemployment experience in the 1980's.

Suggested Citation

  • Olivier Jean Blanchard & Peter Diamond, 1994. "Ranking, Unemployment Duration, and Wages," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 417-434.
    • Handle: RePEc:oup:restud:v:61:y:1994:i:3:p:417-434.
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    References listed on IDEAS

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    1. Olivier Jean Blanchard, 1991. "Two Tools for Analysing Unemployment," International Economic Association Series, in: Marc Nerlove (ed.), Issues in Contemporary Economics, chapter 5, pages 102-127, Palgrave Macmillan.
    2. Barron, John M & Bishop, John, 1985. "Extensive Search, Intensive Search, and Hiring Costs: New Evidence on Employer Hiring Activity," Economic Inquiry, Western Economic Association International, vol. 23(3), pages 363-382, July.
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    5. Peter A. Diamond, 1982. "Wage Determination and Efficiency in Search Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(2), pages 217-227.
    6. Olivier Jean Blanchard & Peter A. Diamond, 1989. "The Aggregate Matching Function," NBER Working Papers 3175, National Bureau of Economic Research, Inc.
    7. Harry J. Holzer & Lawrence F. Katz & Alan B. Krueger, 1991. "Job Queues and Wages," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 739-768.
    8. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
    9. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
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