The Labor Wedge as a Matching Friction

Abstract

The labor wedge accounts for a large fraction of business cycle ‡uctuations. This paper uses a search and matching model to decompose the labor wedge into three classes of labor market frictions and evaluate their role. We …nd that frictions to job destruction and bargaining commonly considered in the search literature are not helpful in explaining the labor wedge. We also identify an asymmetric e¤ect of separation, bargaining and matching frictions on unemployment, as well as a potential solution to Shimer's puzzle.

Hiring through referrals

“…That specification complicated the analysis without adding further insights. 10 Introducing a probability 1 − p that the worker is unproductive to the baseline model of Section 2 yields results that are identical to a rescaling of the matching efficiency parameters toμ = µ * p andρ = ρ * p.…”

“…A previous version of this paper delivered the same qualitative results with a distribution of match-specific productivities that was continuous and log-concave and had a higher mean for the high type assumed that y L > b + (r + δ)K which guarantees that low type workers are hired when productive. 10 As in Section 2, a referral occurs when some firm expands and it is sent at random to one of the incumbent worker's links. When a firm that employs a type-i worker expands, it meets a type-i worker with probability ϕ i u i and a type-k (̸ = i) worker with probability (1 − ϕ i )u k , where u j is the unemployment rate of a type-j worker.…”

Introducing Financial Frictions and Unemployment into a Small Open Economy Model

“…11 The terms in square brackets in (4.13) correspond to utility in the two possible period t + 1 states of the world. With probability 1 F i+1 t+1 the worker survives the exogenous and endogenous separations in period t + 1; in which case its value function in t + 1 is V i+1 t+1 : With the complementary probability, 1 + F i+1 t+1 , the worker separates into unemployment in period t + 1; and enjoys utility, U t+1 :…”

Unemployment and Business Cycles

“…7 While controversial, the standard assumption that the job separation rate is acyclical has been defended on empirical grounds (see Shimer, 2005a). 8 Finally, we think of the time period as one quarter. This time period is relatively long from the point of view of the US labor market, where the median duration of unemployment is around 7 weeks in our sample.…”

“…7 For a recent paper that stresses the importance of job-to-job transitions, see Van Zandweghe (2010). 8 For a di¤erent view, see Fujita and Ramey (2009). 9 See the variable, LNU03008276, in the online database, Fred, provided by the Federal Reserve Bank of St. Louis.…”