Declining Search Frictions, Unemployment, and Growth

Abstract

Over the last century, unemployment, vacancy, job-finding and job-loss rates as well as the Beveridge curve have no trend. Yet, the last century has seen the development and diffusion of many information technologies-such as telephones, fax machines, computers, the Internet-which presumably have increased the efficiency of search in the labor market. We explain this phenomenon using a textbook search-theoretic model of the labor market. We show that there exists an equilibrium in which unemployment, vacancies, job-finding and job-loss rates are constant while the search technology improves over time if and only if firm-worker matches are heterogeneous in quality, the distribution of match qualities is Pareto, and the quality of a match is observed before the start of the employment relationship. Under these conditions, improvements in search lead to an increase in the rate at which workers meet firms and to a proportional decline in the probability that the quality of a firm-worker match is acceptable leading to a constant job-finding rate, unemployment, etc... Interestingly, under the same conditions, unemployment, vacancies, job-finding and job-loss rates are independent of the size of the labor market even in the presence of increasing returns to scale in search. While declining search frictions do not lower unemployment, they contribute to growth. The magnitude of the contribution depends on the thickness of the tail of the Pareto distribution. We present a simple strategy to measure the decline in search frictions and its contribution to growth. A rudimentary implementation of this strategy suggests that the decline in search frictions has been substantial, it has been caused by both improvements in the search technology and increasing returns to scale in the search process, and it has had a non-negligible impact on growth.

Declining Search Frictions and Type-of-Employment Choice

“…Although the interaction of these cost reductions is not unambiguous (see e.g. Albrecht et al (2006)), there is some evidence of increases in matching efficiency (Martellini and Menzio, 2020). We therefore use broadband penetration as a proxy for E as well.…”

“…As a result, our model offers a new perspective on the puzzle identified by Martellini and Menzio (2020). They wonder why unemployment does not show a trend despite apparent improvements in labour market efficiency.…”

“…When matching efficiency increases, labour market tightness falls because of congestion caused by workers leaving self-employment. This insight offers a new perspective on the puzzle, identified by Martellini and Menzio (2020), why advancements in ICT, prompting higher matching efficiency in the labour market, did not result in falling unemployment. In our model, only reductions in goods market frictions unambiguously increase the job-finding probability.…”

Innovation and Entrepreneurship in Housing

“…The possibility that efficiency gains are showing up in price increases due to higher quality matches is a broader issue that applies to all search markets, not just housing. Martellini and Menzio (2018) argue that this may explain why the labor market has not experienced significant declines in job vacancy and unemployment rates despite known technological improvements in job search. Martellini and Menzio (2018) showed that if the match quality distribution is Pareto, then unemployment, job vacancy, job-finding, and job-loss rates remain constant even as the efficiency of search grows over time.…”

“…Martellini and Menzio (2018) argue that this may explain why the labor market has not experienced significant declines in job vacancy and unemployment rates despite known technological improvements in job search. Martellini and Menzio (2018) showed that if the match quality distribution is Pareto, then unemployment, job vacancy, job-finding, and job-loss rates remain constant even as the efficiency of search grows over time. Improvements in search technology show up in productivity growth.…”