The Unemployment Volatility Puzzle: The Role of Matching Costs Revisited

Silva, José Ignacio and Toledo, Manuel (2009): The Unemployment Volatility Puzzle: The Role of Matching Costs Revisited.

Abstract

Recently, Pissarides (2008) has argued that the standard search model with sunk fixed matching costs increases unemployment volatility without introducing an unrealistic wage response in new matches. We revise the role of matching costs and show that when these costs are not sunk and, therefore, can be partially passed on to new hired workers in the form of lower wages, the amplication mechanism of fixed matching costs is considerably reduced and wages in new hired positions become more sensitive to productivity shocks.

• Item Type: MPRA Paper
• Language: English
• Keywords: unemployment volatility puzzle, search and matching, matching costs
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J32 - Nonwage Labor Costs and Benefits ; Retirement Plans ; Private Pensions; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search

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