Diagnosing Labor Market Search Models: A Multiple-Shock Approach
We construct 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. We show that the Mortensen-Pissarides labor market search model requires significantly procyclical and volatile job separations to simultaneously account for high procyclical variations in job finding probabilities as well as relatively small net employment changes. Hence, the model is more fundamentally fl awed than its inability to amplify shocks would suggest. 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.
JEL code: E24; E32; J40
Keywords: Labor Market Search; Mismatch; Business Cycles; Unemployment; Job Vacancies
Suggested citation: Beauchemin, Kenneth, and Murat Tasci, 2007. "Diagnosing Labor Market Search Models: A Multiple-Shock Approach," Federal Reserve Bank of Cleveland, Working Paper no. 07-20.