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Regional Matching Frictions and Aggregate Unemployment

  • Aki Kangasharju
  • Sanna-Mari Hynninen
  • Jaakko Pehkonen

This study demonstrates that a stochastic frontier approach applied to regional level data offers a convenient and interesting method to examine how regional differences in matching efficiency and structural factors contribute to aggregate unemployment. The study reveals notable and temporally stable differences in matching efficiency across travel-to-work areas in Finland. If all areas were as efficient as the most efficient one, the number of hirings would increase by about 40 per cent. This would reduce the aggregate unemployment rate from the current 8.5 per cent level to 6.0 per cent. If all the areas shared the same structural characteristics as the most favourable area, the aggregate unemployment rate would drop to 7.1 per cent.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 383.

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Date of creation: 03 Mar 2006
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Handle: RePEc:fer:dpaper:383
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  1. Aki Kangasharju & Jaakko Pehkonen & Sari Pekkala, 2005. "Returns to scale in a matching model: evidence from disaggregated panel data," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 115-118.
  2. 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.
  3. Turon, Helene & Simon Burgess, 2003. "Unemployment equilibrium and on-the-job search," Royal Economic Society Annual Conference 2003 208, Royal Economic Society.
  4. Patricia M. Anderson & Simon M. Burgess, 2000. "Empirical Matching Functions: Estimation and Interpretation Using State-Level Data," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 93-102, February.
  5. 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.
  6. Blanchard, J.O., 1989. "The Aggregate Matching Function," Working papers 538, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Karsten Albæk & Henrik Hansen, 2004. "The Rise in Danish Unemployment: Reallocation or Mismatch?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(4), pages 515-536, 09.
  8. Pekka Ilmakunnas & Hanna Pesola, 2003. "Regional Labour Market Matching Functions and Efficiency Analysis," LABOUR, CEIS, vol. 17(3), pages 413-437, 09.
  9. Layard, Richard & Bean, Charles, 1989. " Why Does Unemployment Persist?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(2), pages 371-96.
  10. Aomar IBOURK & Béatrice MAILLARD & Serge PERELMAN & Henri R. SNEESSENS, 2001. "Aggregate Matching Efficiency : A Stochastic Production Frontier Approach, France 1990-1994," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001034, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  11. Battese, G E & Coelli, T J, 1995. "A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data," Empirical Economics, Springer, vol. 20(2), pages 325-32.
  12. Holden, Steinar & Nymoen, Ragnar, 2002. " Measuring Structural Unemployment: NAWRU Estimates in the Nordic Countries," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(1), pages 87-104.
  13. Fahr, René & Sunde, Uwe, 2006. "Regional dependencies in job creation: An efficiency analysis for Western Germany," Munich Reprints in Economics 20484, University of Munich, Department of Economics.
  14. Pissarides, Christopher A, 1992. "Loss of Skill during Unemployment and the Persistence of Employment Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1371-91, November.
  15. 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.
  16. 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.
  17. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
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