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A Test Between Unemployment Theories Using Matching Data

  • Coles, Melvyn G
  • Petrongolo, Barbara

A new methodology is described which tests between various equilibrium theories of unemployment using matching data. The Paper shows how to correct econometrically for temporal aggregation effects, where the econometrician’s aim is to identify a matching process using data which is recorded monthly, and also shows how to identify different unemployment theories on the data. As implementing this test requires information on the inflow of new vacancies over time, this Paper uses employment agency data for the UK over the period 1985-99. Although the standard random matching approach provides a reasonably good fit, the empirical evidence provides greater support for ‘stock-flow’ matching. Estimates find that over this period, around 87% of newly laid-off workers are on the long-side of their markets and so match with the flow of new vacancies as those vacancies come onto the market. In particular, these workers’ experience average durations of unemployment which exceed 6 months and their matching rates are highly correlated with the inflow of new vacancies. This job queue interpretation of the matching data has important implications for government policy on long term unemployment and optimal UI. It also suggests that previous estimates of the so-called matching function have been misspecified, which potentially explains the large variation in results obtained in that literature.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3241.

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Date of creation: Mar 2002
Date of revision:
Handle: RePEc:cpr:ceprdp:3241
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  1. Martin J. Conyon & Richard B. Freeman, 2001. "Shared Modes of Compensation and Firm Performance: UK Evidence," NBER Working Papers 8448, National Bureau of Economic Research, Inc.
  2. Hopenhayn, H. & Nicolini, P.J., 1996. "Optimal Unemployment Insurance," RCER Working Papers 421, University of Rochester - Center for Economic Research (RCER).
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  4. Coles, Melvyn G & Smith, Eric, 1998. "Marketplaces and Matching," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 239-54, February.
  5. Freeman, Richard B & Schettkat, Ronald, 2001. " Marketization of Production and the US-Europe Employment Gap," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(0), pages 647-70, Special I.
  6. Alex Bryson & Lorenzo Cappellari & Claudio Lucifora, 2003. "Does union membership really reduce job satisfaction?," LSE Research Online Documents on Economics 20045, London School of Economics and Political Science, LSE Library.
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  8. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  9. Barbara Petrongolo & Christopher A. Pissarides, 2000. "Looking Into the Black Box: A Survey of the Matching Function," CEP Discussion Papers dp0470, Centre for Economic Performance, LSE.
  10. Yashiv, E., 1999. "The Determinants of Equilibrium Unemployment," Papers 36-99, Tel Aviv.
  11. Fredriksson, P. & Holmlund, B., 1998. "Optimal Unemployment Insurance in Search Equilibrium," Papers 1998-2, Uppsala - Working Paper Series.
  12. Ricardo Lagos, 2000. "An Alternative Approach to Search Frictions," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 851-873, October.
  13. Daron Acemoglu & Robert Shimer, 1998. "Efficient Unemployment Insurance," NBER Working Papers 6686, National Bureau of Economic Research, Inc.
  14. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  15. 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.
  16. P. Diamond, 1980. "Aggregate Demand Management in Search Equilibrium," Working papers 268, Massachusetts Institute of Technology (MIT), Department of Economics.
  17. Berman, Eli, 1997. "Help Wanted, Job Needed: Estimates of a Matching Function from Employment Service Data," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages S251-92, January.
  18. Cahuc, Pierre & Lehmann, Etienne, 2000. "Should unemployment benefits decrease with the unemployment spell?," Journal of Public Economics, Elsevier, vol. 77(1), pages 135-153, July.
  19. Katharine G. Abraham, 1987. "Help-Wanted Advertising, Job Vacancies, and Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1), pages 207-248.
  20. Shavell, Steven & Weiss, Laurence, 1979. "The Optimal Payment of Unemployment Insurance Benefits over Time," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1347-62, December.
  21. Burdett, Kenneth & Coles, Melvyn G & van Ours, Jan C, 1994. "Temporal Aggregation Bias in Stock-Flow Models," CEPR Discussion Papers 967, C.E.P.R. Discussion Papers.
  22. Coles, Melvyn G, 1999. "Turnover Externalities with Marketplace Trading," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 851-68, November.
  23. repec:oup:qjecon:v:106:y:1991:i:1:p:163-79 is not listed on IDEAS
  24. Richard Jackman & Christopher A. Pissarides & S Savouri, 1990. "Labour Market Policies and Unemployment in the OECD," CEP Discussion Papers dp0011, Centre for Economic Performance, LSE.
  25. Gregg, Paul & Wadsworth, Jonathan, 1996. "How Effective Are State Employment Agencies? Jobcentre Use and Job Matching in Britain," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(3), pages 443-67, August.
  26. repec:oup:restud:v:65:y:1998:i:2:p:235-60 is not listed on IDEAS
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