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Wage Determination and Labor Market Volatility under Mismatch

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  • William Hawkins

    (University of Rochester)

Abstract

Shimer (2007, American Economic Review) introduced a model of mismatch, in which limited mobility of vacant jobs and unemployed workers provides a microfoundation for their coexistence in equilibrium. Shimer assumed that the short side of a local labor market receives all the gains from trade, and argues that the model helps to explain the volatility of unemployment and the vacancy-unemployment ratio in response to productivity shocks. I show that the assumption on wages is essential for this conclusion by considering alternative assumptions. When wages are determined according to the Shapley value, they depend more smoothly on local labor market conditions, but unemployment and the vacancy-unemployment ratio are even more volatile. However, in both cases amplification relative to the Mortensen-Pissarides benchmark arises only because the implied process for wages is more volatile.

Suggested Citation

  • William Hawkins, 2012. "Wage Determination and Labor Market Volatility under Mismatch," 2012 Meeting Papers 797, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:797
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    References listed on IDEAS

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    1. Olivier Blanchard & Jordi Galí, 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 1-30, April.
    2. Perez-Castrillo, David & Wettstein, David, 2001. "Bidding for the Surplus : A Non-cooperative Approach to the Shapley Value," Journal of Economic Theory, Elsevier, vol. 100(2), pages 274-294, October.
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    Cited by:

    1. William Hawkins, 2013. "Worker Flows under Mismatch," 2013 Meeting Papers 479, Society for Economic Dynamics.

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