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Diagnosing labor market search models: a multiple-shock approach

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  • Kenneth Beauchemin
  • Murat Tasci

Abstract

We construct a multiple shock, discrete time version of the Mortensen-Pissarides labor market search model to investigate the basic model’s well-known tendency to underpredict the volatility of key labor market variables. In addition to the standard labor productivity shock, we introduce shocks to matching effi ciency and job separation. We conduct two set of experiments. First, we estimate the joint probability distribution of shocks that simultaneously satisfy the observed data and the fi rst-order conditions of the multiple-shock model, and then simulate its properties. Although the multiple-shock model generates significantly more volatility while preserving the Beveridge curve relationship, it generates counterfactual implications for the cyclicality of job separations. Using a business cycle accounting approach, we design the second set of experiments to isolate the sources of model incompleteness and show that the model requires significant procyclical and volatile matching efficiency and counterfactually procyclical job separations to render the observed data without error. We conjecture that the basic Mortensen-Pissarides model lacks mechanisms to generate sufficiently strong labor market reallocation over the business cycle, and suggest nontrivial labor force participation and job-to-job transitions as promising avenues of research.

Suggested Citation

  • Kenneth Beauchemin & Murat Tasci, 2012. "Diagnosing labor market search models: a multiple-shock approach," Working Paper 1211, Federal Reserve Bank of Cleveland, revised 01 Apr 2012.
  • Handle: RePEc:fip:fedcwp:1211
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    Cited by:

    1. Andrea Pescatori & Murat Tasci, 2011. "Search frictions and the labor wedge," Working Paper 1111, Federal Reserve Bank of Cleveland.
    2. Francesco Furlanetto & Nicolas Groshenny, "undated". "Mismatch Shocks and Unemployment During the Great Recession," School of Economics Working Papers 2015-14, University of Adelaide, School of Economics.
    3. Francesco Furlanetto & Nicolas Groshenny, 2012. "Matching efficiency and business cycle fluctuations," Working Paper 2012/07, Norges Bank.
    4. Ortego-Marti, Victor, 2017. "The Cyclical Behavior Of Unemployment And Vacancies With Loss Of Skills During Unemployment," Macroeconomic Dynamics, Cambridge University Press, vol. 21(06), pages 1277-1304, September.
    5. Beauchemin, Kenneth & Tasci, Murat, 2014. "Diagnosing Labor Market Search Models: A Multiple-Shock Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 18(03), pages 548-572, April.
    6. Joanna Tyrowicz & Lucas Velde & Jan Svejnar, 2017. "Effects Of Labor Reallocation On Productivity And Inequality—Insights From Studies On Transition," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 712-732, July.
    7. Mileva, Mariya, 2013. "Optimal monetary policy in response to shifts in the beveridge curve," Kiel Working Papers 1823, Kiel Institute for the World Economy (IfW).
    8. Reicher, Christopher Phillip, 2009. "What can a New Keynesian labor matching model match?," Kiel Working Papers 1496, Kiel Institute for the World Economy (IfW).
    9. Mikhail Simutin & JessieJiaxu Wang & Lars Kuehn, 2014. "A Labor Capital Asset Pricing Model," 2014 Meeting Papers 695, Society for Economic Dynamics.
    10. Reicher, Christopher Phillip, 2010. "Evaluating the search and matching model with sticky wages," Kiel Working Papers 1674, Kiel Institute for the World Economy (IfW).

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    Keywords

    Employment ; Labor market ; Labor turnover;

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