Diagnosing labor market search models: a multiple-shock approach

No 07-20, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: This paper constructs a multiple-shock version of the Mortensen-Pissarides labor market search model to investigate the basic model?s well-known tendency to under predict the volatility of key labor market variables. Data on U.S. job finding and job separation probabilities are used to help estimate the parameters of a three-dimensional shock process comprising labor productivity, job separation, and matching or ?allocative? efficiency. The authors show that the Mortensen-Pissarides labor market search model requires significantly procyclical and volatile job separations to simultaneously account for high procyclical variations in jobfinding probabilities as well as relatively small net employment changes. Hence, the model is more fundamentally flawed than its inability to amplify shocks would suggest. This leads the authors to conclude that the model lacks mechanisms to generate procyclical matching efficiency and labor force reallocation. As for the latter, the authors conjecture that nontrivial labor force participation and job-to-job transitions are promising avenues of research. ; This paper has been revised as WP 08-13, with the same title.

Keywords: Labor market; Business cycles (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: DIAGNOSING LABOR MARKET SEARCH MODELS: A MULTIPLE-SHOCK APPROACH (2014)
Working Paper: Diagnosing labor market search models: a multiple-shock approach (2012)
Working Paper: Diagnosing labor market search models: a multiple-shock approach (2008)
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DOI: 10.26509/frbc-wp-200720

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