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Labor market heterogeneity and the aggregate matching function

The matching function -a key building block in models of labor market frictions- implies that the job finding rate depends only on labor market tightness. We estimate such a matching function and find that the relation, although remarkably stable over 1967-2007, broke down spectacularly after 2007. We argue that labor market heterogeneities are not fully captured by the standard matching function, but that a generalized matching function that explicitly takes into account worker heterogeneity and market segmentation is fully consistent with the behavior of the job finding rate. The standard matching function can break down when, as in the Great Recession, the average characteristics of the unemployed change too much, or when dispersion in labor market conditions -the extent to which some labor markets fare worse than others- increases too much.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/1395.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1395.

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Date of creation: Oct 2010
Date of revision: Sep 2013
Handle: RePEc:upf:upfgen:1395
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Salant, Stephen W, 1977. "Search Theory and Duration Data: A Theory of Sorts," The Quarterly Journal of Economics, MIT Press, vol. 91(1), pages 39-57, February.
  2. Carlos Carrillo-Tudela & Ludo Visschers, 2013. "Unemployment and Endogenous Reallocation over the Business Cycle," CESifo Working Paper Series 4079, CESifo Group Munich.
  3. Kory Kroft & Fabian Lange & Matthew J. Notowidigdo, 2013. "Duration Dependence and Labor Market Conditions: Evidence from a Field Experiment," The Quarterly Journal of Economics, Oxford University Press, vol. 128(3), pages 1123-1167.
  4. Petrongolo, Barbara, 1999. "Re-Employment Probabilities and Returns to Matching," CEPR Discussion Papers 2266, C.E.P.R. Discussion Papers.
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  6. Erceg, Christopher & Levin, Andrew, 2013. "Labor Force Participation and Monetary Policy in the Wake of the Great Recession," CEPR Discussion Papers 9668, C.E.P.R. Discussion Papers.
  7. Daniel Aaronson & Jonathan Davis & Luojia Hu, 2012. "Explaining the decline in the U.S. labor force participation rate," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Mar.
  8. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," NBER Working Papers 13290, National Bureau of Economic Research, Inc.
  9. Michael W. Elsby & Bart Hobijn & Aysegul Sahin, 2010. "The Labor Market in the Great Recession," NBER Working Papers 15979, National Bureau of Economic Research, Inc.
  10. Christian Merkl & Thijs van Rens, 2011. "Selective hiring and welfare analysis in labor market models," Economics Working Papers 1277, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2012.
  11. Robert Shimer, 2012. "Reassessing the Ins and Outs of Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 127-148, April.
  12. Regis Barnichon & Michael Elsby & Bart Hobijn & Aysegül Sahin, 2010. "Which industries are shifting the Beveridge curve?," Working Paper Series 2010-32, Federal Reserve Bank of San Francisco.
  13. Baker, Michael, 1992. "Unemployment Duration: Compositional Effects and Cyclical Variability," American Economic Review, American Economic Association, vol. 82(1), pages 313-21, March.
  14. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  15. Willem Van Zandweghe, 2012. "Interpreting the recent decline in labor force participation," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-34.
  16. Daniel Borowczyk-Martins & Gregory Jolivet & Fabien Postel-Vinay, 2013. "Accounting For Endogeneity in Matching Function Estimation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 440-451, July.
  17. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
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