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An Incentive Theory of Matching

  • Alessio J. G. Brown
  • Christian Merkl
  • Dennis Snower

This paper presents a theory explaining the labor market matching process through microeconomic incentives. There are heterogeneous variations in the characteristics of workers and jobs, and firms face adjustment costs in responding to these variations. Matches and separations are described through firms' job offer and firing decisions and workers' job acceptance and quit decisions. This approach obviates the need for a matching function. On this theoretical basis, we argue that the matching function is vulnerable to the Lucas critique. Our calibrated model for the U.S. economy can account for important empirical regularities that the conventional matching model cannot

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Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1512.

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Length: 28 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:kie:kieliw:1512
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  1. Christian Haefke & Marcus Sonntag & Thijs van Rens, 2006. "Wage Rigidity and Job Creation," 2006 Meeting Papers 773, Society for Economic Dynamics.
  2. James S. Costain & Michael Reiter, 2003. "Business cycles, unemployment insurance and the calibration of matching models," Economics Working Papers 872, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2006.
  3. repec:oup:restud:v:61:y:1994:i:3:p:397-415 is not listed on IDEAS
  4. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
  5. Kai Christoffel & James Costain & Gregory de Walque & Keith Kuester & Tobias Linzert & Stephen Millard & Olivier Pierrard, 2009. "Inflation dynamics with labour market matching: assessing alternative specifcations," BCL working papers 38, Central Bank of Luxembourg.
  6. repec:oup:restud:v:57:y:1990:i:3:p:381-402 is not listed on IDEAS
  7. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  8. Carlos Thomas, 2006. "Search and Matching Frictions and Optimal Monetary Policy," CEP Discussion Papers dp0743, Centre for Economic Performance, LSE.
  9. Fujita, Shigeru & Ramey, Garey, 2007. "Job matching and propagation," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3671-3698, November.
  10. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, 02.
  11. Diaz-Vazquez, Pilar & Snower, Dennis J., 2002. "Can Insider Power Affect Employment?," CEPR Discussion Papers 3472, C.E.P.R. Discussion Papers.
  12. Barbara Petrongolo & Christopher Pissarides, 2000. "Looking into the black box: a survey of the matching function," LSE Research Online Documents on Economics 2122, London School of Economics and Political Science, LSE Library.
  13. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  14. Krause, M.U. & Lubik, T.A., 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Discussion Paper 2003-113, Tilburg University, Center for Economic Research.
  15. Michele Belot & Jan Boone & Jan Van Ours, 2007. "Welfare-Improving Employment Protection," Economica, London School of Economics and Political Science, vol. 74(295), pages 381-396, 08.
  16. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  17. Wouter J. den Haan & Garey Ramey & Joel Watson, 1997. "Job Destruction and Propagation of Shocks," NBER Working Papers 6275, National Bureau of Economic Research, Inc.
  18. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  19. Shigeru Fujita & Garey Ramey, 2007. "The cyclicality of separation and job finding rates," Working Papers 07-19, Federal Reserve Bank of Philadelphia.
  20. René Fahr & Uwe Sunde, 2004. "Occupational job creation: patterns and implications," Oxford Economic Papers, Oxford University Press, vol. 56(3), pages 407-435, July.
  21. Ricardo Lagos, 2000. "An Alternative Approach to Search Frictions," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 851-873, October.
  22. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2005. "Unemployment and vacancy fluctuations in the matching model: inspecting the mechanism," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 19-50.
  23. Fahr, René & Sunde, Uwe, 2001. "Disaggregate Matching Functions," IZA Discussion Papers 335, Institute for the Study of Labor (IZA).
  24. 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.
  25. Díaz-Vázquez, Pilar & Snower, Dennis J., 2003. "Can insider power affect employment?," Open Access Publications from Kiel Institute for the World Economy 2992, Kiel Institute for the World Economy (IfW).
  26. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  27. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  28. Assar Lindbeck & Dennis J. Snower, 2001. "Insiders versus Outsiders," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 165-188, Winter.
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