By Jeremy Lise, Costas Meghir and Jean-Marc Robin
We develop an empirical search-matching model which is suitable for analyzing the wage, employment and welfare impact of regulation in a labor market with heterogeneous workers and jobs. To achieve this we develop an equilibrium model of wage determination and employment which extends the current literature on equilibrium wage determination with matching and provides a bridge between some of the most prominent macro models and microeconometric research. The model incorporates productivity shocks, long-term contracts, on-the-job search and counter-offers. Importantly, the model allows for the possibility of assortative matching between workers and jobs due to complementarities between worker and job characteristics. We use the model to estimate the potential gain from optimal regulation and we consider the potential gains and redistributive impacts from optimal unemployment insurance policy. Here optimal policy is defined as that which maximizes total output and home production, accounting for the various constraints that arise from search frictions. The model is estimated on the NLSY using the method of moments.
I have highlighted several search-and-matching papers lately because I think this filed is making significant progress towards understand the processes in the labor market. This paper is certainly part of this current that bridge micro and macro aspects of employment. It shows how one can include relevant complexity in the markets while still be able to solve for an equilibrium and relate it to data in a sensible way and obtain plausible results.