Diagnosing labor market search models: a multiple-shock approach
Kenneth Beauchemin and
Murat Tasci
No 813, Working Papers (Old Series) from Federal Reserve Bank of Cleveland
Abstract:
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.
Keywords: Labor market; Business cycles (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-bec, nep-dge and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)
Downloads: (external link)
https://doi.org/10.26509/frbc-wp-200813 Persistent link
https://www.clevelandfed.org/-/media/project/cleve ... ock-approach-pdf.pdf Full text (application/pdf)
Related works:
Journal Article: DIAGNOSING LABOR MARKET SEARCH MODELS: A MULTIPLE-SHOCK APPROACH (2014) 
Working Paper: Diagnosing labor market search models: a multiple-shock approach (2012) 
Working Paper: Diagnosing labor market search models: a multiple-shock approach (2007) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:0813
Ordering information: This working paper can be ordered from
DOI: 10.26509/frbc-wp-200813
Access Statistics for this paper
More papers in Working Papers (Old Series) from Federal Reserve Bank of Cleveland Contact information at EDIRC.
Bibliographic data for series maintained by 4D Library ().