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Diagnosing labor market search models: a multiple-shock approach

  • Kenneth Beauchemin
  • Murat Tasci

This paper constructs a multiple-shock version of the Mortensen-Pissarides labor market search model to investigate the basic model’s well-known tendency to under predict the volatility of key labor market variables. Data on U.S. job finding and job separation probabilities are used to help estimate the parameters of a three-dimensional shock process comprising labor productivity, job separation, and matching or ‘allocative’ efficiency. The authors show that the Mortensen-Pissarides labor market search model requires significantly procyclical and volatile job separations to simultaneously account for high procyclical variations in jobfinding probabilities as well as relatively small net employment changes. Hence, the model is more fundamentally flawed than its inability to amplify shocks would suggest. This leads the authors to conclude that the model lacks mechanisms to generate procyclical matching efficiency and labor force reallocation. As for the latter, the authors conjecture that nontrivial labor force participation and job-to-job transitions are promising avenues of research. ; This paper has been revised as WP 08-13, with the same title.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0720.

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Date of creation: 2007
Date of revision: 30 Dec 2007
Handle: RePEc:fip:fedcwp:0720
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