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Island Matching

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  • Dale T. Mortensen

Abstract

A synthesis of the Lucas-Prescott island model and the Mortensen- Pissarides matching model of unemployment is studied. By assumption, all unmatched workers and jobs are randomly assigned to islands at the beginning of each period and the number of matches that form on a particular island is the minimum of the two realizations. When calibrated to the recently observed averages of U.S. unemployment and vacancy rates, the model fits the observed vacancy-unemployment Beveridge relationship very well and implies an implicit log linear relationship between the job finding rate and the vacancy-unemployment relationship with an elasticity near 0.5. The constrained efficient solution to the model is decentralized by a equilibrium outcome in which wages on each island are determined by a modified auction. Although the efficient solution explains only about 25% of the observed volatility in the U.S. vacancy-unemployment ratio, an equilibrium outcome in which wages are determined as the solution to a strategic bargaining game explains almost all of it.

Suggested Citation

  • Dale T. Mortensen, 2007. "Island Matching," NBER Working Papers 13287, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13287
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    References listed on IDEAS

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    1. Diamond, Peter & Fudenberg, Drew, 1989. "Rational Expectations Business Cycles in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 606-619, June.
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    6. Robert Shimer, 2007. "Mismatch," American Economic Review, American Economic Association, vol. 97(4), pages 1074-1101, September.
    7. Dale Mortensen & Eva Nagypal, 2007. "More on Unemployment and Vacancy Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(3), pages 327-347, July.
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    9. Mortensen, Dale T, 1989. " The Persistence and Indeterminancy of Unemployment in Search Equilibrium," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(2), pages 347-370.
    10. Robert E. Hall & Paul R. Milgrom, 2008. "The Limited Influence of Unemployment on the Wage Bargain," American Economic Review, American Economic Association, vol. 98(4), pages 1653-1674, September.
    11. Mortensen, Dale T, 1982. "Property Rights and Efficiency in Mating, Racing, and Related Games," American Economic Review, American Economic Association, vol. 72(5), pages 968-979, December.
    12. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
    13. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    14. Mortensen, Dale T, 1999. "Equilibrium Unemployment Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 889-914, November.
    15. Peter A. Diamond, 1982. "Wage Determination and Efficiency in Search Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(2), pages 217-227.
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    Cited by:

    1. Kaas Leo, 2010. "Variable Search Intensity with Coordination Unemployment," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-33, October.
    2. Julien, Benoit & Kennes, John & Ritter, Moritz, 2018. "Bidding for teams," Labour Economics, Elsevier, vol. 52(C), pages 68-73.
    3. Carlos Carrillo‐Tudela & Ludo Visschers, 2023. "Unemployment and Endogenous Reallocation Over the Business Cycle," Econometrica, Econometric Society, vol. 91(3), pages 1119-1153, May.
    4. Bauer, Anja, 2013. "Mismatch unemployment : evidence from Germany 2000-2010," IAB-Discussion Paper 201310, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    5. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2235-2246, November.
    6. Cecilia Vives, 2019. "Human capital and market size," Papers in Regional Science, Wiley Blackwell, vol. 98(1), pages 75-92, February.
    7. Carlos Usabiaga & Fernando Núñez & Pablo Álvarez de Toledo, 2013. "Segmentación del mercado de trabajo, clusters, movilidad y duración de desempleo con datos individuales," Economic Working Papers at Centro de Estudios Andaluces E2013/02, Centro de Estudios Andaluces.
    8. Álvarez de Toledo, Pablo & Núñez, Fernando & Usabiaga, Carlos, 2014. "An empirical approach on labour segmentation. Applications with individual duration data," Economic Modelling, Elsevier, vol. 36(C), pages 252-267.
    9. Simonetta Longhi, 2012. "Job Competition and the Wage Curve," Regional Studies, Taylor & Francis Journals, vol. 46(5), pages 611-620, August.
    10. Carlos Usabiaga & Pablo Álvarez de Toledo & Fernando Núñez, 2013. "Labour Market Segmentation, Clusters, Mobility And Unemployment Duration With Individual Microdata," EcoMod2013 5688, EcoMod.
    11. Claudio Michelacci & Josep Pijoan-Mas, 2012. "Intertemporal Labour Supply with Search Frictions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(3), pages 899-931.
    12. Kaas, Leo, 2008. "Variable Search Intensity in an Economy with Coordination Unemployment," IZA Discussion Papers 3697, Institute of Labor Economics (IZA).
    13. Benoit Julien & John Kennes & Moritz Ritter, 2013. "Bidding for Clubs," Economics Working Papers 2013-19, Department of Economics and Business Economics, Aarhus University.
    14. Guido Menzio & Randall Wright, 2016. "Introduction to the Special Issue in Honor of Dale Mortensen," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 1-3, January.

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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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