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Skill mismatch in equilibrium unemployment

  • Ronald Bachmann

We analyse the effect of skill mismatch in a search model of equilibrium unemployment with risk-neutral agents, endogenous job destruction, and two-sided ex-ante heterogeneity. First, we examine the interaction of labour market institutions and skill mismatch. We find that skill mismatch changes the results obtained in a model with ex-ante homogeneity. Second, we analyse the interaction of skill mismatch and labour market institutions for the difference in the labour market experience of continental Europe on the one hand and the US on the other hand. We find that within-group skill mismatch cannot explain the rise in unemployment in Europe relative to the US. This result is due to the endogeneity of job destruction and stands at odds with previous findings in the literature. We can, however, confirm the fact that unemployment benefits potentially play a beneficial role by providing a subsidy to search. Generally, we argue that in search models with fixed match characteristics, job destruction should be endogenised in order to take account of heterogeneous decision rules.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2005-034.pdf
File Function: Revised version, 2005
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2005-034.

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Length: 35 pages
Date of creation: Jun 2005
Date of revision: Aug 2005
Handle: RePEc:hum:wpaper:sfb649dp2005-034
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  1. Ljungqvist, Lars & Sargent, Thomas J., 1997. "The European Unemployment Dilemma," Working Paper Series 481, Research Institute of Industrial Economics.
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  11. Pierre Cahuc & Stéphane Carcillo & André Zylberberg, 2014. "Labor Economics," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01076752, HAL.
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  14. Ljungqvist, Lars & Sargent, Thomas J, 2004. "European Unemployment and Turbulence Revisited in a Matching Model," CEPR Discussion Papers 4183, C.E.P.R. Discussion Papers.
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  16. Rocheteau, Guillaume, 1999. "Balanced-Budget Rules and Indeterminacy of the Equilibrium Unemployment Rate," Oxford Economic Papers, Oxford University Press, vol. 51(3), pages 399-409, July.
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