Adaptive Learning and Labor Market Dynamics

Abstract

The standard search and matching model with rational expectations is well known to be unable to generate amplification in unemployment and vacancies. We document a new feature that cannot be replicated: properties of wage forecasts published by institutions in the near term. A parsimonious model with adaptive learning can provide a solution to both of these problems. Firms choose vacancies by forecasting wages using simple autoregressive models; they have greater incentive to post vacancies at the time of a positive productivity shock because of overoptimism about the discounted value of expected profits.

On the ambiguity of job search

“…1 1 Another alternative to represent imperfect labor information is to assume that workers are recursively updating market information using the adaptive learning approach discussed by Evans & Honkapohja (2012) (e.g., Damdinsuren & Zaharieva, 2022; Di Pace et al., 2021). It is important to note that ambiguity aversion and subjective learning are not incompatible, instead our ambiguity‐aversion model has particular advantages in terms of tractability. …”