Labor Search and Matching in Macroeconomics

The labor search and matching model plays a growing role in macroeconomic analysis. This paper provides a critical, selective survey of the literature. Four fundamental questions are explored: how are unemployment, job vacancies, and employment determined as equilibrium phenomena? What determines worker flows and transition rates from one labor market state to another? How are wages determined? What role do labor market dynamics play in explaining business cycles and growth? The survey describes the basic model, reviews its theoretical extensions, and discusses its empirical applications in macroeconomics. The model has developed against the background of difficulties with the use of the neoclassical, frictionless model of the labor market in macroeconomics. Its success includes the modelling of labor market outcomes as equilibrium phenomena, the reasonable fit of the data, and — when inserted into business cycle models — improved performance of more general macroeconomic models. At the same time, there is evidence against the Nash solution used for wage setting and an active debate as to the ability of the model to account for some of the cyclical facts.search, matching, macroeconomics, business cycles, worker flows, growth, policy

The Beveridge Curve

The Beveridge curve depicts a negative relationship between unemployed workers and job vacancies, a robust finding across countries. The position of the economy on the curve gives an idea as to the state of the labour market. The modern underlying theory is the search and matching model, with workers and firms engaging in costly search leading to random matching. The Beveridge curve depicts the steady state of the model, whereby inflows into unemployment are equal to the outflows from it, generated by matching.business cycle, job search, matching function, Phillips curve, unemployment, vacancies, wage inflation

Evaluating the Performance of the Search and Matching Model

Does the search and matching model fit aggregate U.S. labor market data? While the model has become an important tool of macroeconomic analysis, recent literature pointed to some failures in accounting for the data. This paper aims to answer two questions: (i) Does the model fit the data, and, if so, on what dimensions? (ii) Does the data "fit" the model, i.e. what are the data which are relevant to be explained by the model? The analysis shows that the model does fit certain specifications of the data on many dimensions, though not on all. This includes capturing the high persistence and high volatility of most of the key variables, as well as the negative co-variation of unemployment and vacancies. It offers a workable, empirically-grounded version of the model for the analysis of aggregate U.S. labor market dynamics. The paper provides macroeconomists guidance concerning the relevant "building block" for modelling the labor market, both in terms of the model and in terms of the data.search, matching, U.S. labor market, vacancies, labor market flows, business cycles.

U.S. Labor Market Dynamics Revisited

The picture of U.S. labor market dynamics is opaque. Empirical studies have yielded contradictory findings and debates have emerged regarding their implications. This paper aims at clarifying the picture, which is important for the understanding of the operation of the labor market, for the study of business cycles, for the explanation of wage behavior, and for the formulation of policy. The paper determines what facts can be established, what are their implications, and what remains to be further investigated. The main contributions made here are: (i) Listing of data facts that can be agreed upon. These indicate that there is considerable cyclicality and volatility of both accessions to employment and separations from it. Hence, both are important for the understanding of the business cycle. (ii) Presenting the business cycle facts of key series. (iii) Pointing to specific gaps in the data picture: disparities in the measurement of the sizeable flows between employment and the pool of workers out of the labor force, disagreements about the relative volatility of job finding and separation rates across data sets, and the fact that the fit of the gross flows data with net employment growth data differs across studies and is not high. The definite characterization of labor market dynamics depends upon the closing of these data gaps.labor market dynamics, gross worker flows, job finding, separation, hiring, business cycles

In brief: Unequal shares: the economics of elite football clubs

In brief: Unequal shares: the economics of elite football clubs

Labor and the Market Value of the Firm

What role does labor play in a firm's market value? We explore this question using a production-based asset pricing model with frictions in the adjustment of both capital and labor. We posit that hiring of labor is akin to investment in capital and that the two interact, with the interaction being a crucial determinant of the time series behavior of market value. We use aggregate U.S. corporate sector data to estimate firms' optimal hiring and investment decisions and the consequences for firms' value. The model generates a good fit of the data. We decompose the estimated market value, thereby quantifying the link between firms' value and gross hiring flows, employment, gross investment flows, and physical capital. We find that a conventional specification -- quadratic adjustment costs for capital and no hiring costs -- performs poorly. Hiring and investment flows, unlike employment and capital stocks, are volatile and both are essential to account for market value volatility. A key result is that firms' value embodies the value of hiring and investment over and above the capital stock.production-based asset pricing, labor market frictions, gross flows, Q-model, GMM

Labor and the market value of the firm

What role does labor play in a firm’s market value? We explore this question using a production-based asset pricing model with frictions in the adjustment of both capital and labor. We posit that hiring of labor is akin to investment in capital and that the two interact, with the interaction being a crucial determinant of the time series behavior of market value. We use aggregate U.S. corporate sector data to estimate firms' optimal hiring and investment decisions and the consequences for firms' value. The model generates a good fit of the data. We decompose the estimated market value, thereby quantifying the link between firms' value and gross hiring flows, employment, gross investment flows, and physical capital. We find that a conventional specification -- quadratic adjustment costs for capital and no hiring costs -- performs poorly. Hiring and investment flows, unlike employment and capital stocks, are volatile and both are essential to account for market value volatility. A key result is that firms' value embodies the value of hiring and investment over and above the capital stock

A cyclical strategy to manage COVID-19, save lives and avoid economic ruin

We can exploit the way the virus develops in people, opening activity for four days, closing it for ten, and repeating the cycle, writes Eran Yashi

Macroeconomic Policy Lessons of Labor Market Frictions

The paper explores the consequences of macroeconomic policy for labor market outcomes in the presence of frictions. It shows how policy may be useful in overriding frictions, as well as how it might generate adverse outcomes. The analysis looks at the main tools of macroeconomic policy and pertains to both the non-stochastic steady state and to business cycle fluctuations. A partial-equilibrium, empirically-grounded model is used to simulate policy effects. It relies on a reduced-form VAR of the actual data to specify the stochastic behavior of exogenous variables, precluding the possibility that labor market results will be affected by misspecifications in other parts of a more general macroeconomic model. The key results are that policy has effects on the stochastic behavior of key variables - measures that reduce unemployment also reduce its persistence and increase the volatility of vacancies. Hiring subsidies and unemployment benefits have substantial effects on labor market outcomes, while employment subsidies or wage tax reductions are not very effective policy instruments

Forward-Looking Hiring Behavior and the Dynamics of the Aggregate Labor Market

aggregate labor market, aggregate fluctuations, labor market flows, search, matching, vacancies.