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Labor-market Volatility in a Matching Model with Worker Heterogeneity and Endogenous Separations

  • Andri Chassamboulli

Recessions are times when the quality of the unemployment pool is lower, because entry into unemployment is biased in favor of low-productivity workers. I develop a search and matching model with worker heterogeneity and endogenous separations that has this feature. I show that in a recession a compositional shift in unemployment towards low-productivity workers, due an increase in job separations, lowers the matching effectiveness of searching firms, thereby causing their average recruiting cost to rise. This acts to further depress vacancy creation in a recession. In contrast to most models that allow for endogenous separations, this model generates a realistic Beveridge curve correlation.

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Paper provided by University of Cyprus Department of Economics in its series University of Cyprus Working Papers in Economics with number 13-2010.

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Length: 25 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:ucy:cypeua:13-2010
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