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

By Andri Chassamboulli

http://d.repec.org/n?u=RePEc:ucy:cypeua:13-2010&r=dge

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.

I would have thought that the quality of the pool of unemployed workers would have improved in a recession, because the marginal fired worker must be better than in a boom. But the evidence seems to be that unskilled workers are, in relative terms, even more unemployed. The consequences of this on search costs and match qualities are interesting, leading to a good match on the Beveridge curve.

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

  1. Andri Chassamboulli says:

    Thank you for this. I am looking forward to more comments and suggestions.

  2. Andri says:

    Indeed, the quality of the pool of unemployed workers improves in a recession, because the marginal fired worker is better than in a boom. But still, the matching efficiency searching firms is lower in a recession, because firms are more selective about the productivity of the new matches they wish to create. In other words, the rise in unemployment during recessions due to the destruction of low-productivity jobs does not facilitate the creation of new jobs, because the workers that enter unemployment are those whose “quality” falls below the firms’ acceptance threshold.

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