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DIAGNOSING LABOR MARKET SEARCH MODELS: A MULTIPLE-SHOCK APPROACH

Published online by Cambridge University Press:  22 August 2012

Kenneth Beauchemin  and
Murat Tasci
Kenneth Beauchemin
Affiliation:
Federal Reserve Bank of Minneapolis
Murat Tasci*
Affiliation:
Federal Reserve Bank of Cleveland
*
Address correspondence to: Murat Tasci, Research Department, P.O. Box 6387, Federal Reserve Bank of Cleveland, Cleveland, OH 44101-1387, USA; e-mail: [email protected].
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Abstract

We construct a multiple-shock, discrete-time version of the Mortensen–Pissarides labor market search model to investigate the basic model's well-known tendency to underpredict the volatility of key labor market variables. In addition to the standard labor productivity shock, we introduce shocks to matching efficiency and job separation. We estimate the multiple-shock model and then simulate its properties. Although it generates significantly more volatility while preserving the Beveridge curve relationship, the multiple-shock model generates counterfactual implications for the cyclicality of job separations. Using a business cycle accounting approach, next we show that the model requires significantly procyclical and volatile matching efficiency and counterfactually procyclical job separations to render the observed data without error. We conjecture that the basic Mortensen–Pissarides model lacks mechanisms to generate sufficiently strong labor market reallocation over the business cycle, and suggest nontrivial labor force participation and job-to-job transitions as promising avenues of research.

Keywords

Labor Market SearchMismatchBusiness CyclesUnemploymentJob Vacancies
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 3 , April 2014 , pp. 548 - 572
Copyright
Copyright © Cambridge University Press 2012 

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