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

Author

Listed:
  • Suren Basov

    () (Department of Economics and Finance, La Trobe University)

  • John Ian King

    (The University of Melbourne)

  • Lawrence Uren

    (The University of Melbourne)

Abstract

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.

Suggested Citation

  • Suren Basov & John Ian King & Lawrence Uren, 2010. "The Employed, the Unemployed, and the Unemployable: Directed Search with Worker Heterogeneity," Working Papers 2010.03, School of Economics, La Trobe University.
  • Handle: RePEc:ltr:wpaper:2010.03
    as

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    References listed on IDEAS

    as
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    Cited by:

    1. Kim, Kyungmin & Kircher, Philipp, 2013. "Efficient Competition through Cheap Talk: Competing Auctions and Competitive Search without Ex Ante Price Commitment," CEPR Discussion Papers 9785, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Directed search; worker heterogeneity; unemployment. EDIRC Provider-Institution: RePEc:edi:smlatau;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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