Matching Models of Equilibrium Unemployment: An Overview

Lisi, Gaetano (2011): Matching Models of Equilibrium Unemployment: An Overview. Published in: LAP LAMBERT Academic Publishing , Vol. ISBN-1, No. book (4 March 2011): pp. 1-64.

Abstract

This book aims to provide an overview of the labour market's benchmark macroeconomic models. The matching models of equilibrium unemployment are, in fact, the primary and most popular theoretical tools used by economists to evaluate various labour market policies and to study one of the key macroeconomic variables: the unemployment rate. It has been recognised that unemployment has also a structural nature which persists over the business cycle. The matching models, i.e. the models à la Mortensen-Pissarides, explain the co-existence in equilibrium of unemployment and vacancies through frictions in matching workers and firms. Furthermore, these models generate predictions that have the right direction: unemployment goes up in recession and down in boom, while job vacancies shift in the opposite direction. The central role of these models in imperfect labour markets has recently been confirmed by the 2010 Nobel Prize for economy awarded to the founders of this approach: Peter Diamond, Dale Mortensen and Christopher Pissarides.

• Item Type: MPRA Paper
• Language: English
• Keywords: Matching and Job Search Theory, Vacancies, Labour Markets with frictions
• Subjects: J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers

References

Albrecht, James, and Susan Vroman (2002). A Matching Model with Endogenous Skill Requirements, International Economic Review, 43(1), 283-305;

Albrecht, James, Lucas Navarro, and Susan Vroman (2009). The Effects of Labour Market Policies in an Economy with an Informal Sector, Economic Journal, 119(539), 1105-1129;

Alchian, Armen A. (1969). Information Costs, Pricing and Resource Unemployment, Western Economic Journal, 7 (June), 109–128;

Andolfatto, David (2008). Macroeconomic Theory and Policy (2nd Edition), MPRA Paper, 6403;

Andrews, Martyn, Steve Bradley, Dave Stott, and Richard Upward (2009). Estimating the Stock-flow Matching Model Using Micro Data, mimeo, July (revise and resubmit from Journal of the European Economic Association);

Bagliano, Fabio C., and Giuseppe Bertola (1999). Metodi Dinamici e Fenomeni Macroeconomici, Il Mulino, Bologna;

Bellman, Richard Ernest (1957). Dynamic Programming, Princeton University Press, Princeton, New Jersey;

Bertola, Giuseppe, and Ricardo J. Caballero (1994). Cross-Sectional Efficiency and Labour Hoarding in a Matching Model of Unemployment, Review of Economic Studies, 61(3), 435-456;

Beveridge, William Henry (1944). Full Employment in a Free Society. George Allen & Unwin, London;

Blanchard, Oliver Jean, and Peter Diamond (1989). The Beveridge Curve, Brookings Papers on Economic Activity, 20(1989-1), 1-76;

Blanchard, Oliver Jean, and Peter Diamond (1990a). The Cyclical Behaviour of the Gross Flows of U.S. Workers, Brookings Papers on Economic Activity, 21(1990-2), 85-156;

Blanchard, Oliver Jean, and Peter Diamond (1990b). The Aggregate Matching Function. In Diamond, P. (Eds), Growth, Productivity, Unemployment, Essays to Celebrate Bob Solow's Birthday, MIT Press, Cambridge MA, 159-201;

Boeri, Tito (1996). Is Job Turnover Countercyclical ?, Journal of Labor Economics, 14(4), 603-625;

Boeri, Tito, and Pietro Garibaldi (2002). Shadow Activity and Unemployment in a Depressed Labour Market, CEPR Discussion Papers, 3433;

Boeri, Tito, and Pietro Garibaldi (2006). Shadow Sorting, CEPR Discussion Papers, 5487;

Bosch, Mariano, and Julen Esteban-Pretel (2009). Cyclical Informality and Unemployment, CIRJE F-Series Discussion Papers, 613;

Bouev, Maxim (2002). Official Regulations and the Shadow Economy: A Labour Market Approach, William Davidson Institute Working Papers Series, 524;

Bouev, Maxim (2005). State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector, William Davidson Institute Working Papers Series, 764;

Bowden, Roger J. (1980). On the Existence of Secular Stability of the u–v Loci, Economica, 47(185), February, 35–50;

Budd, Alan, Paul Levine, and Peter Smith (1988). Unemployment, Vacancies and the Long-Term Unemployed, The Economic Journal, 98(393), 1071-1091;

Burda, Michael, and Charles Wyplosz (1994). Gross worker and Job Flows in Europe, European Economic Review, 38(6), 1287-1315;

Coles, Melvyn G., and Eric Smith (1998). Marketplaces and Matching, International Economic Review, 39(1), 239-254;

Coles, Melvyn G., and Abhinay Muthoo (1998). Strategic Bargaining and Competitive Bidding in a Dynamic Market Equilibrium, Review of Economic Studies, 65(2), 235-260;

Mole, Melvyn G., and Barbara Petrongolo (2008). A Test Between Stock-Flow Matching and The Random Matching Function Approach, International Economic Review, 49(4), 1113-1141;

Davis, Steven J., and John C. Haltiwanger (1992). Gross Job Creation, Gross Job Destruction, and Employment Reallocation, The Quarterly Journal of Economics, 107(3), 819-863;

Diamond, Peter A. (1982a). Aggregate Demand Management in Search Equilibrium, Journal of Political Economy, 90(5), 881–894;

Diamond, Peter A. (1982b). Wage Determination and Efficiency in Search Equilibrium, Review of Economic Studies, XLIX, 217–227;

Diamond, Peter A. (1984). A Search Equilibrium Approach to the Micro Foundations of Macroeconomics. Cambridge, The MIT Press;

Diamond, Peter A., and Eric Maskin (1979). An Equilibrium Analysis of Search and Breach of Contract, I: Steady States, Bell Journal of Economics, 10(1), Spring, 282-316;

Dow, J. C. R., e Dicks-Mireaux, L. A. (1958). The Excess Demand for Labour: A Study of Conditions in Great Britain 1946-1956, Oxford Economic Papers, 10(1), 1-33;

Ebrahimy, Ehsan, and Robert Shimer (2010). Stock-flow Matching, Journal of Economic Theory, 145(4), 1325-1353;

Friedman, Milton (1968). The Role of Monetary Policy, American Economic Review, 58(1), 1-17;

Fugazza, Marco, and Jean-Francois Jacques (2004). Labor Market Institutions, Taxation and the Underground Economy, Journal of Public Economics, 88(1-2), 395-418;

Garibaldi, Pietro (1998). Job Flow Dynamics and Firing Restrictions, European Economic Review, 42(2), 245-275;

Garibaldi, Pietro (2006). Hiring Freeze and Bankruptcy in Unemployment Dynamics, IZA Discussion Papers, 2263;

Gërxhani, Klarita (2004). The Informal Sector in Developed and Less Developed Countries: A Literature Survey, Public Choice, 120(3_4), 267-300;

Gregg, Paul, and Barbara Petrongolo (2005). Stock-flow Matching and the Performance of the Labor Market, European Economic Review, 49(8), 1987-2011;

Hall, Robert E. (1979). A Theory of the Natural Unemployment Rate and the Duration of Employment, Journal of Monetary Economics, 5(2), 153-169;

Hansen, Bent (1970). Excess Demand, Unemployment, Vacancies and Wages, The Quarterly Journal of Economics, 84(1), 1–23;

Hagedorn, Marcus, and Iourii Manovskii (2008). The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited, American Economic Review, 98(4), 1692-1706;

Hicks, John R. (1963). The Theory of Wages (2nd edition), London: Macmillan;

Holt, C. C., and David, M. H. (1966). The Concept of Job Vacancies in a Dynamic Theory of the Labour Market. In The Measurement and Interpretation of Job Vacancies, New York: Columbia University Press;

Hutt, William H. (1939). The Theory of Idle Resources, London: Jonathan Cape;

Jackman, Richard, Richard Layard, and Christopher A. Pissarides (1989). On Vacancies, Oxford Bulletin of Economics and Statistics, 51(4), 377-394;

Jackman, Richard, Christopher A. Pissarides, and Savvas Savouri (1990). Labour Market Policies and Unemployment in the OECD, Economic Policy, 11, 449–490;

Keynes, John Maynard (1936). The General Theory of Employment, Interest and Money, Palgrave Macmillan, London;

Kolm, Ann-Sofie, and Birthe Larsen (2003). Wages, Unemployment, and the Underground Economy, CESifo Working Paper Series, 1086;

Kolm, Ann-Sofie, and Søren Bo Nielsen (2008). Under-reporting of Income and Labor Market Performance, Journal of Public Economic Theory, 10(2), 195-217;

Lagos, Ricardo (2000). An Alternative Approach to Search Frictions, Journal of Political Economy, 108(5), 851-873;

Laing, Derek, Theodore Palivos, and Ping Wang (1995). Learning, Matching and Growth, Review of Economic Studies, 62(1), 115-129;

La Porta, Rafael, and Andrei Shleifer (2008). The Unofficial Economy and Economic Development, NBER Working Papers, 14520;

Lisi, Gaetano, and Maurizio Pugno (2010a). Entrepreneurship and the Hidden Economy: An Extended Matching Model, International Economic Journal, 24(4), 587-605;

Lisi, Gaetano, and Maurizio Pugno (2010b). The Underground Economy in a Matching Model of Endogenous Growth, Working Papers University of Cassino, 2010-07;

Mortensen, Dale T. (1970). A Theory of Wage and Employment Dynamics, In Phelps, E., et al. (editor), The Microeconomic Foundations of Employment and Inflation Theory, Norton, New York;

Mortensen, Dale T. (1987). Job Search and Labor Market Analysis, in O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 2, chapter 15, pages 849-919;

Mortensen, Dale T., and Christopher A. Pissarides (1994). Job Creation and Job Destruction in the Theory of Unemployment, Review of Economic Studies, 61(3), 397-415;

Mortensen, Dale T., and Christopher A. Pissarides (1998). Technological Progress, Job Creation and Job Destruction, Review of Economic Dynamics, 1(4), 733-753;

Mortensen, Dale T., and Christopher A. Pissarides (1999). New Developments in Models of Search in the Labor Market, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627;

Petrongolo, Barbara, and Christopher A. Pissarides (2001). Looking into the Black Box: A Survey of the Matching Function, Journal of Economic Literature, 39(2), 390-431;

Phelps, Edmund S. (1967). Phillips Curves, Expectations of Inflation and Optimal Unemployment, Economica, 34, 254-281;

Phelps, Edmund S. (1968). Money-Wage Dynamics and Labor-Market Equilibrium, Journal of Political Economy, 76, 678–711;

Phelps, Edmund S. (1972). Inflation Policy and Unemployment Theory: The Cost-Benefit Approach to Monetary Planning, New York: Norton;

Phelps, Edmund S., et al. (1970). Microeconomic Foundations of Employment and Inflation Theory, New York: Norton;

Pissarides, Christopher A. (1979). Job Matchings with State Employment Agencies and Random Search, Economic Journal, 89(356), 818-833;

Pissarides, Christopher A. (1984). Efficient Job Rejection, Economic Journal, 94(376a), 97-108, Supplement;

Pissarides, Christopher A. (1985a). Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages, American Economic Review, 75(4), 676-690;

Pissarides, Christopher A. (1985b). Taxes, Subsidies, and Equilibrium Unemployment, Review of Economic Studies, 52(1), 121-133;

Pissarides, Christopher A. (1986). Unemployment and vacancies in Britain, Economic Policy, 1(3), 499-559;

Pissarides, Christopher A. (2000). Equilibrium Unemployment Theory (2nd Edition), MIT Press Books;

Pissarides, Christopher A. (2002). Company Start-Up Costs and Employment, CEP Discussion Papers, dp0520;

Shimer, Robert (2007). Mismatch, American Economic Review, 97(4), 1074-1101;

Stevens, Margaret (2007). New Microfoundations For The Aggregate Matching Function, International Economic Review, 48(3), 847-868;

Uren, Lawrence (2007). Entrepreneurship and Labour Market Fluctuations, Economics Bulletin, 10(13), 1-11;

Wasmer, Etienne, and Philippe Weil (2004). The Macroeconomics of Labor and Credit Market Imperfections, American Economic Review, 94(4), 944-963;