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The Cyclical Behavior of Equilibrium Unemployment and Vacancies – A Comment

  • Simon Burgess
  • Helene Turon

    ()

The Mortensen-Pissarides model is an attractive model because it is tractable, delivers some intuitive comparative statics and permits policy analysis. However, Shimer (2005) shows that the model generates far too little volatility in its key variables - unemployment and vacancies - relative to the variation in the shock variables. Shimer identifes the flexibility of wages as the key issue. In this Comment, we show that it is possible to generate suffcient volatility in unemployment and vacancies whilst retaining the standard wage determination process. We set out a model with two important changes from the Mortensen-Pissarides approach: job search by the employed is allowed, and the vacancy creation condition is changed to allow churning of workers. Calibrating the model to UK data, we show that our model can produce volatility in the unemployment and vacancy series to match the data; we confirm for the UK that the Mortensen-Pissarides model cannot, as shown by Shimer for the US.

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File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp05573.pdf
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Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 05/573.

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Length: 22 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:bri:uobdis:05/573
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  1. Pissarides, Christopher A, 1994. "Search Unemployment with On-the-Job Search," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 457-75, July.
  2. Eriksson, Stefan & Gottfries, Nils, 2000. "Ranking of job applicants, on-the-job search, and persistent unemployment," Working Paper Series 2000:8, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  3. Mortensen, Dale T & Pissarides, Christopher, 1999. "New Developments in Models of Search in the Labour Market," CEPR Discussion Papers 2053, C.E.P.R. Discussion Papers.
  4. Den Haan, Wouter & Haefke, Christian & Ramey, Gary, 2001. "Shocks and Institutions in a Job Matching Model," CEPR Discussion Papers 2970, C.E.P.R. Discussion Papers.
  5. Postel-Vinay, Fabien & Robin, Jean-Marc, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," CEPR Discussion Papers 3548, C.E.P.R. Discussion Papers.
  6. 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.
  7. repec:inr:wpaper:155908 is not listed on IDEAS
  8. Stephen Nickell & Patricia Jones & Glenda Quintini, 2002. "A Picture of Job Insecurity Facing British Men," Economic Journal, Royal Economic Society, vol. 112(476), pages 1-27, January.
  9. Burgess, Simon M, 1993. "A Model of Competition between Unemployed and Employed Job Searchers: An Application to the Unemployment Outflow Rate in Britain," Economic Journal, Royal Economic Society, vol. 103(420), pages 1190-204, September.
  10. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  11. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  12. Simon Burgess & Helene Turon, 2005. "Worker Flows, Job Flows and Unemployment in a Matching Model," Bristol Economics Discussion Papers 05/572, Department of Economics, University of Bristol, UK.
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