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The Employed, the Unemployed, and the Unemployable: Directed Search with Worker Heterogeneity

  • Suren Basov

    ()

    (Department of Economics and Finance, La Trobe University)

  • John Ian King

    (The University of Melbourne)

  • Lawrence Uren

    (The University of Melbourne)

We examine the implications of worker heterogeneity on the equilibrium matching process, using a directed search model. Worker abilities are selected from a general distribution, subject to some weak regularity requirements, and the firms direct their job offers to workers. We identify conditions under which some fraction of the workforce will be "unemployable": no firm will approach them even though they offer positive surplus. For large markets we derive a simple closed form expression for the equilibrium matching function. This function has constant returns to scale and two new terms, which are functions of the underlying distribution of worker productivities: the percentage of unemployable workers, and a measure of heterogeneity (κ).The equilibrium unemployment rate is increasing in κ and, under certain circumstances, is increasing in the productivity of highly skilled workers, despite endogenous entry. A key empirical prediction of the theory is that κ ≥ 1. We examine this prediction, using data from several countries.

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File URL: http://www.latrobe.edu.au/__data/assets/pdf_file/0005/130919/2010.03.pdf
File Function: First version, 2010.03
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Paper provided by School of Economics, La Trobe University in its series Working Papers with number 2010.03.

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Length: 44 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:ltr:wpaper:2010.03
Contact details of provider: Web page: http://www.latrobe.edu.au/economics

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  1. Galenianos, Manolis & Kircher, Philipp, 2009. "Directed search with multiple job applications," Journal of Economic Theory, Elsevier, vol. 144(2), pages 445-471, March.
  2. Robert Shimer, 2007. "Reassessing the Ins and Outs of Unemployment," NBER Working Papers 13421, National Bureau of Economic Research, Inc.
  3. Michael Elsby & Bart Hobijn & Aysegül Sahin, 2009. "Unemployment dynamics in the OECD," Working Paper Series 2009-04, Federal Reserve Bank of San Francisco.
  4. James Albrecht & Pieter Gautier, 2004. "Equilibrium Directed Search with Multiple Applications," Econometric Society 2004 Latin American Meetings 330, Econometric Society.
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  7. Moen, E.R., 1995. "Competitive Search Equilibrium," Memorandum 37/1995, Oslo University, Department of Economics.
  8. Robert Shimer, 2005. "The Assignment of Workers to Jobs in an Economy with Coordination Frictions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 996-1025, October.
  9. Benoit Julien & John Kennes & Ian King, 2001. "Residual Wage Disparity and Coordination Unemployment," CAM Working Papers 2004-20, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics, revised Nov 2004.
  10. John Kennes & Benoit Julien & Ian King, 2002. "The Mortensen Rule and Efficient Coordination Unemployment," Macroeconomics 0206001, EconWPA.
  11. 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.
  12. Jan Eeckhout & Philipp Kircher, 2008. "Sorting and Decentralized Price Competition," PIER Working Paper Archive 08-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  13. Philipp Kircher, 2009. "Efficiency of Simultaneous Search," Journal of Political Economy, University of Chicago Press, vol. 117(5), pages 861-913, October.
  14. Julien, B. & Kennes, J. & King, I., 1998. "Bidding for Labour," Discussion Papers dp98-03, Department of Economics, Simon Fraser University.
  15. Gabriele Camera & Cemil Selcuk, 2009. "Price Dispersion with Directed Search," Journal of the European Economic Association, MIT Press, vol. 7(6), pages 1193-1224, December.
  16. Shouyong Shi, 1998. "Frictional Assignment," Cahiers de recherche CREFE / CREFE Working Papers 74, CREFE, Université du Québec à Montréal.
  17. Petrongolo, Barbara & Pissarides, Christopher, 2000. "Looking Into The Black Box: A Survey Of The Matching Function," CEPR Discussion Papers 2409, C.E.P.R. Discussion Papers.
  18. Shouyong Shi, 2002. "A Directed Search Model of Inequality with Heterogeneous Skills and Skill-Biased Technology," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 467-491.
  19. Margaret Stevens, 2007. "New Microfoundations For The Aggregate Matching Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(3), pages 847-868, 08.
  20. Benoît Julien & John Kennes & Ian King, 2005. "Ex post bidding and efficient coordination unemployment," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 174-193, February.
  21. James D. Montgomery, 1991. "Equilibrium Wage Dispersion and Interindustry Wage Differentials," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 163-179.
  22. Albrecht, James & Tan, Serene & Gautier, Pieter & Vroman, Susan, 2004. "Matching with multiple applications revisited," Economics Letters, Elsevier, vol. 84(3), pages 311-314, September.
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