The employed, the Unemployed, and the Unemployable: Directed Search with Worker Heterogeneity

Suren Basov, Ian King and Lawrence Uren

http://d.repec.org/n?u=RePEc:ltr:wpaper:1837-2198/978-0-9807041-5-0&r=dge

We examine the implications of worker heterogeneity on the equilibrium matching process, using a directed search model. Worker abilities are selected from a general distribution, subject to some weak regularity requirements, and the firms direct their job offers to workers. We identify conditions under which some fraction of the workforce will be “unemployable”: no firm will approach them even though they offer positive surplus. For large markets we derive a simple closed form expression for the equilibrum matching function. This function has constant returns to scale and two new terms, which are functions of the underlying distribution of worker productivities: the percentage of unemployable workers, and a measure of heterogeneity “kappa”.The equilibrium unemployment rate is increasing in “kappa” and, under certain circumstances, is increasing in the productivity of highly skilled workers, despite endogenous entry. A key empirical prediction of the theory is that “kappa” = 1. We examine this prediction, using data from several countries.

Directed search model are all the rage nowadays, and they are useful, too, in getting some new insights, and this paper shows. For one, it comes up with some sort of reduced form matching function that could be used in other models. It also gives us some better understanding about long-term unemployment or unemployability, something people worry about quite a bit with the current recession and its potentially profound structural changes.