The Modern Job Search and Matching Theory of Unemployment

Hello world,


I know that I haven't blogged in a while and that my fans are demanding some posts.  What I have decided to do is post this paper I have been working on all semester for my labor economics class. My underlying goal was to make something initially so abstract ( i.e. Modern Job Search and Matching Theory of Unemployment) seem intuitive and simple so that the general public can understand aspects of modern macroeconomics.

In order to achieve my goal I therefore encourage anyone who reads this to download the paper. The paper is on the Modern Job Search and Matching Theory of Unemployment which describes unemployment in terms of search and matching frictions.  I take the following from my abstract and introduction so that you get the general idea:


From Abstract:


This paper presents The Modern Search and Matching Theory of Unemployment in a manner that clears up most of the confusion surrounding it. The theory is broken up into sections analyzing the wage-setting curve, vacancy-supply curve, job creation curve and the Beveridge curve. Additionally, several major applications of the theory including the effects of search intensity, the minimum wage and unemployment compensation are reviewed. A look at the timing of movements in the unemployment rate during recessions is also provided. The hypothesis that labor demand is the main driving force behind the unemployment rate is tested and matching efficiency is also empirically estimated. The analysis concludes with an early search model and the appendix covers the mathematical form of the main model covered in the body of the paper.


From Introduction:



Among academics and professional economists alike the modern job search and matching theory of unemployment has become the industry wide norm for analyzing fluctuation and movements within the labor market. The contribution it has made to modern macroeconomics is revolutionary and its implications will take years to fully comprehend and appreciate. Standing at the forefront of modern macroeconomic research it has already received much praise as witnessed with the recognition of the theories founding fathers Christopher A. Pissarides, Peter A. Diamond and Dale T. Mortensen by The Royal Swedish Academy of Sciences.


Unfortunately, it is tendency of undergraduate economics departments to lag in teaching the revolutionary work of their graduate school counterparts. Even with the marvelous results and realistic nature of the modern search and matching theory of unemployment this time seems to be no different. Undergraduates everywhere are encouraged to analyze the labor market with neoclassical assumptions about market clearing, homogeneous agents and perfect information. Then they are told to peruse through the Bureau of Labor Statistics' Employment Situation only to observe the civilian unemployment rate persist around nine percent. A model as realistic as the modern job search and matching theory of unemployment has implications that are reinforced to students of economics by the news, while a model which calls for markets to always clear lacks that crucial element of believability. The time for a clear explanation must be without further delay. 


This paper seeks to explore the the modern job search and matching theory of unemployment by placing the Beveridge curve at the center of the analysis. Applications of the model will be brought to light. These include analyzing the effects of search intensity, the minimum wage, and unemployment insurance benefits on the unemployment rate. Additionally, a graphical analysis will be provided to shed light on why and when the unemployment rate moves during a recession. Using the Job Openings and Labor Turnover Survey and FRED, the hypothesis that labor demand drives movements in the unemployment rate during recessions is tested. 


Moreover, insights from behavioral economics are used to discuss some possible labor market policies that take advantage of this theory and individuals observed behavioral tendencies. Lastly an early and very microeconomic model of job search is brought to light to stress the importance of imperfect information in job search and the impacts of a workers reservation wage on their duration of unemployment.  

 A link to download the paper is found here.