Exogenous vs. Endogenous Separation

This paper assesses how various approaches to modelling the separation margin affect the ability of the Mortensen-Pissarides job matching model to explain key facts about the aggregate labor market. Allowing for realistic time variation in the separation rate, whether exogenous or endogenous, greatly increases the unemployment variability generated by the model. Specifications with exogenous separation rates, whether constant or time-varying, fail to produce realistic volatility or productivity comovement of the separation rate and worker flows. Specifications with endogenous separation rates, on the other hand, succeed along these dimensions. In addition, the endogenous separation model with on-the-job search yields a realistic Beveridge curve correlation. All of the specifications generate insufficient volatility of the job finding rate, vacancies and market tightness when calibrated in a standard manner. The latter deficiencies are remedied when the Hagedorn-Manovskii calibration is used, and the on-the-job search model, in particular, performs well along nearly all dimensions considered.