English, Article, Journal or magazine article edition: Diagnosing labor market search models: a multiple-shock approach Kenneth Beauchemin; Murat Tasci

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  • preprint
Language
  • English

Edition details

Title
  • Diagnosing labor market search models: a multiple-shock approach
Author
  • Kenneth Beauchemin
  • Murat Tasci
Physical Description
  • preprint
Notes
  • We construct a multiple-shock 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. 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. Although our multiple-shock model generates some more volatility, it has counterfactual implications for the cyclicality of unemployment and vacancies. Our second exercise forces the model to be the data-generating process to uncover the necessary realizations of all three shocks. We show that the Mortensen-Pissarides labor market search model requires significantly procyclical and volatile matching efficiency and job separations to simultaneously account for high procyclical variations in job-finding probabilities as well as relatively small net employment changes in the data. Hence, the model is more fundamentally flawed than its inability to amplify shocks would suggest. We also show that variation in job separations accounts for most of the employment fluctuations, suggesting that endogenous separations could be the key feature of an improved model. This leads us to conclude that the model lacks mechanisms to generate procyclical matching efficiency and labor force reallocation. As for the latter, we conjecture that nontrivial labor force participation and job-to-job transitions are promising avenues of research. Note: This paper is a revised version of an earlier working paper of the same title, WP 07-20.
  • RePEc:fip:fedcwp:0813
  • 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.
  • Labor market ; Business cycles
Language
  • English
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