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Worker Heterogeneity and Labor Market Volatility in Matching Models

  • Michael Pries

    (University of Notre Dame)

Shimer (2005) demonstrated that aggregate productivity shocks in a standard matching model cause fluctuations in key labor market statistics---such as the job-finding rate, the vacancy/unemployment ratio, and the unemployment rate---that are too small by an order of magnitude. This paper shows that when the standard model is extended to allow for worker heterogeneity, it exhibits considerably greater volatility. In the model, marginal workers, whose productivity only slightly exceeds the value of their alternative use of time, constitute a disproportionate share of unemployment on average, and that share rises when aggregate conditions deteriorate. These composition effects cause firms to open fewer vacancies during downturns. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.10.003
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 11 (2008)
Issue (Month): 3 (July)
Pages: 664-678

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Handle: RePEc:red:issued:06-175
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  1. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
  2. 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.
  3. Acemoglu, D., 1996. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," Working papers 96-15, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  5. Louis S. Jacobson & Robert J. LaLonde & Daniel Sullivan, 1992. "Earnings Losses of Displaced Workers," Upjohn Working Papers and Journal Articles 92-11, W.E. Upjohn Institute for Employment Research.
  6. James Costain & Michael Reiter, 2005. "Business Cycles, Unemployment Insurance and the Calibration of Matching Models," Working Papers 215, Barcelona Graduate School of Economics.
  7. Robert E. Hall, 2005. "The Amplification of Unemployment Fluctuations through Self-Selection," NBER Working Papers 11186, National Bureau of Economic Research, Inc.
  8. Nickell, Stephen & Bell, Brian, 1995. "The Collapse in Demand for the Unskilled and Unemployment across the OECD," Oxford Review of Economic Policy, Oxford University Press, vol. 11(1), pages 40-62, Spring.
  9. Juan J. Dolado & Marcel Jansen & Juan F. Jimeno, 2008. "On the job search in a matching model with heterogeneous jobs and workers," Working Papers 0813, Banco de EspaƱa;Working Papers Homepage.
  10. Robert Shimer, 1999. "The Impact of Young Workers on the Aggregate Labor Market," NBER Working Papers 7306, National Bureau of Economic Research, Inc.
  11. 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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