Wage Determination and Labor Market Volatility under Mismatch

William Hawkins

No 797, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: Shimer (2007, American Economic Review) introduced a model of mismatch, in which limited mobility of vacant jobs and unemployed workers provides a microfoundation for their coexistence in equilibrium. Shimer assumed that the short side of a local labor market receives all the gains from trade, and argues that the model helps to explain the volatility of unemployment and the vacancy-unemployment ratio in response to productivity shocks. I show that the assumption on wages is essential for this conclusion by considering alternative assumptions. When wages are determined according to the Shapley value, they depend more smoothly on local labor market conditions, but unemployment and the vacancy-unemployment ratio are even more volatile. However, in both cases amplification relative to the Mortensen-Pissarides benchmark arises only because the implied process for wages is more volatile.

Date: 2012
New Economics Papers: this item is included in nep-dge and nep-lma
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