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Unobserved Bilateral Search on the Labor Market: A Theory-Based Correction for a Common Flaw in Empirical Matching Studies

  • Sunde, Uwe


    (University of Munich)

This paper develops a model of equilibrium unemployment with (unobservable) endogenous on-the-job search and (partly unobservable) endogenous search behavior by firms. The model allows to analyze crowding-out of unemployed job seekers by endogenous on-the job search of employees, and the interaction of job search behavior and vacancy posting policies of firms. Moreover, it is shown that the neglect of endogenous but not observable behavior in the empirical literature on labor matching leads to systematically biased estimates of the matching elasticities, posing a caveat on the results of previous studies testing for constant returns of the matching function. The theoretical model presented allows to predict the direction of the bias. We propose a correction for the estimates of empirical matching functions that leads to unbiased estimates of the matching elasticities. The empirical implications of the theoretical model are tested and confirmed using German administrative data, and unbiased estimates of matching elasticities are presented.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 520.

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Length: 38 pages
Date of creation: Jun 2002
Date of revision:
Handle: RePEc:iza:izadps:dp520
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  1. Blanchard, O.J. & Diamond, P., 1990. "Ranking, Unemployment Duration, And Wages," Working papers 546, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Calvó-Armengol, Antoni & Zenou, Yves, 2001. "Job Matching, Social Network and Word-of-Mouth Communication," CEPR Discussion Papers 2797, C.E.P.R. Discussion Papers.
  3. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  4. van Ours, J.C. & Broersma, L., 1999. "Job searchers, job matches and the elasticity of matching," Other publications TiSEM c199f354-b73c-49b6-84f6-e, Tilburg University, School of Economics and Management.
  5. Albrecht, James W. & Gautier, Pieter A. & Vroman, Susan B., 2003. "Matching with multiple applications," Economics Letters, Elsevier, vol. 78(1), pages 67-70, January.
  6. Pietro Garibaldi, 1998. "Search Unemployment with Advance Notice," IMF Working Papers 98/119, International Monetary Fund.
  7. 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.
  8. Pissarides, Christopher A, 1994. "Search Unemployment with On-the-Job Search," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 457-75, July.
  9. van Ours, Jan C., 1995. "An empirical note on employed and unemployed job search," Economics Letters, Elsevier, vol. 49(4), pages 447-452, October.
  10. Postel-Vinay, Fabien & Robin, Jean-Marc, 2002. "Equilibrium Wage Dispersion with Worker and Employer Heterogeneity," CEPR Discussion Papers 3548, C.E.P.R. Discussion Papers.
  11. Fahr, René & Sunde, Uwe, 2001. "Strategic Hiring Behavior in Empirical Matching Functions," IZA Discussion Papers 320, Institute for the Study of Labor (IZA).
  12. Burdett, Kenneth & Coles, Melvyn G, 1999. "Long-Term Partnership Formation: Marriage and Employment," Economic Journal, Royal Economic Society, vol. 109(456), pages F307-34, June.
  13. Gerard A. Pfann, 2001. "Downsizing," Working Papers 0110, Harris School of Public Policy Studies, University of Chicago.
  14. Lindeboom, Maarten & van Ours, Jan C & Renes, Gusta, 1994. "Matching Employers and Workers: An Empirical Analysis on the Effectiveness of Search," Oxford Economic Papers, Oxford University Press, vol. 46(1), pages 45-67, January.
  15. 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.
  16. 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.
  17. Belzil, Christian, 2000. "Job Creation and Job Destruction, Worker Reallocation, and Wages," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 183-203, April.
  18. Petrongolo, Barbara, 1999. "Re-Employment Probabilities and Returns to Matching," CEPR Discussion Papers 2266, C.E.P.R. Discussion Papers.
  19. Boeri, Tito, 1998. "Enforcement of Employment Security Regulations, On-The-Job Search and Unemployment Duration," CEPR Discussion Papers 1850, C.E.P.R. Discussion Papers.
  20. Melvyn Coles & Barbara Petrongolo, 2003. "A Test Between Unemployment Theories Using Matching Data," CEP Discussion Papers dp0570, Centre for Economic Performance, LSE.
  21. Adriana D. Kugler & Gilles Saint-Paul, 2004. "How Do Firing Costs Affect Worker Flows in a World with Adverse Selection?," Journal of Labor Economics, University of Chicago Press, vol. 22(3), pages 553-584, July.
  22. Broersma, Lourens & Van Ours, Jan C., 1999. "Job searchers, job matches and the elasticity of matching," Labour Economics, Elsevier, vol. 6(1), pages 77-93, March.
  23. Warren, Ronald Jr., 1996. "Returns to scale in a matching model of the labor market," Economics Letters, Elsevier, vol. 50(1), pages 135-142, January.
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