On April 15–16, 2011, Northwestern University and the Chicago Fed co-sponsored a conference in honor of Dale Mortensen—a Northwestern University professor, Chicago Fed consultant, and co-recipient (along with Peter Diamond and Christopher Pissarides) of the 2010 Nobel Prize in economics, awarded for his analysis of markets with search frictions. This article summarizes one panel that presented work on the current state of the U.S. labor market, using Mortensen’s research.Labor market ; Macroeconomics

David Benson

English

Research Papers in Economics

Macroeconomic policy and labor markets: Lessons from  
Dale Mortensen’s research
by David Benson, associate economist
On April 15–16, 2011, Northwestern University and the Chicago Fed co-sponsored  
a conference in honor of Dale Mortensen—a Northwestern University professor,  
Chicago Fed consultant, and co-recipient (along with Peter Diamond and Christopher 
Pissarides) of the 2010 Nobel Prize in economics, awarded for his analysis of markets 
with search frictions. This article summarizes one panel that presented work on the 
current state of the U.S. labor market, using Mortensen’s research.
1. U.S. Beveridge curve
Note: See the text for further details. 
SourceS: U.S. Bureau of Labor Statistics, Job Openings and Labor Turnover Survey 
and civilian unemployment rate series, from Haver Analytics. 
vacancy rate
Chicag­ o­Fed­Letter
ESSAYS ON ISSUES                                               THE FEDERAL RESERVE BANK                          AUGUST 2011
                                                                                 OF CHICAGO                                                          NUMBER 289b
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The panel­featured­Gadi­Barlevy,­Fed-
eral­Reserve­Bank­of­Chicago;­David­
Andolfatto,­Federal­Reserve­Bank­of­
St.­Louis;­Lawrence­
Christiano,­North-
western­University;­
Robert­Hall,­Stan-
ford­University;­and­
Gianluca­Violante,­
New­York­Univer-­
sity.1­The­panelists­
discussed­how­
Mortensen’s­work­
provides­a­useful­
framework­for­inter-
preting­recent­labor­
market­developments­
(e.g.,­sustained­high­
unemployment).­
The­Diamond–
Mortensen–Pissarides­
framework­predicts­­
a­downward­sloping­
relationship­between­
unemployment­and­
job­vacancies­ —­ what­
economists­call­a­
“Beveridge­curve.”­
Most­of­the­time,­and­
certainly­before­the­Great­Recession,2­
the­job­vacancy­rate­(the­number­of­
unfilled­jobs­divided­by­the­labor­force)­
is­negatively­related­to­the­unemploy-
ment­rate­(see­figure­1).­The­panel­­
focused­on­the­fact­that­from­2009:Q2­
through­much­of­2010,­job­vacancies­
rose­while­unemployment­remained­
virtually­unchanged,­suggesting­a­shift­
in­the­Beveridge­curve.­The­difference­
between­the­black­data­(pre-shift)­and­
red­data­(post-shift)­in­figure­1­illustrates­
this.­The­panelists­debated­whether­
and­how­the­underlying­parameters­
that­affect­the­Beveridge­curve­might­
have­changed,­and­they­discussed­
whether­the­changes­are­a­sign­of­a­
“structural­shift”—­e.g.,­a­shock­that­
makes­it­harder­for­firms­to­find­workers­
who­possess­the­skills­for­the­types­of­
jobs­firms­are­seeking­to­staff.­The­pan-
elists­also­discussed­the­role­of­mone-
tary­policy­in­addressing­the­high­rate­
of­unemployment­in­light­of­the­appar-
ent­shift­of­the­Beveridge­curve.­
The value of a filled job
In­his­presentation,­Barlevy­argued­
that­two­types­of­shocks­can­affect­­
the­unemployment­rate­in­a­typical­
Mortensen-style­model:­a­shock­to­the­
ability­of­firms­to­find­workers­(or­­
labor­market­mismatch)­and­a­shock­
to­the­profitability­of­filling­any­given­
unemployment rate
December 2000–November 2007 
December 2007–February 20113. U.S. Beveridge curves, by recession period
Notes: The plotted data are for the December 1969–November 1972, November 
1973–March 1977, and July 1990–March 1993 periods. The dates within the figure 
indicate the starts and ends of recessions according to the National Bureau of 
Economic Research. See the text for further details.
sources: Lawrence Christiano’s calculations based on data from the U.S. Bureau 
of Labor Statistics, civilian unemployment rate series; and Conference Board,  
Help-Wanted Advertising Index. 
vacancy rate 
unemployment rate
December 1969
November 1970
November 1973
March 1975
July 1990
March 1991
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3   4  5  6  5  6  7  8  9  6  7  8
2. A flattened U.S. Beveridge curve 
Notes: Curves are fitted lines through the relevant data. See the text for further details.
sources: David Andolfatto’s calculations based on data from the U.S. Bureau of Labor 
Statistics, Job Openings and Labor Turnover Survey and civilian unemployment rate 
series, from Haver Analytics. 
job openings rate in percent
unemployment rate in percent
December 2000–November 2007 
December 2007–February 2011 
Beveridge curve for December 2000–November 2007
Beveridge curve for December 2007–February 2011
noted that in the 1969–70, 1973–75, and 
1990–91 recessions, there was a consistent 
“fishhook” data pattern of rising vacan-
cies without a change in unemployment 
(see figure 3), similar to what is shown 
in figure 1. Yet economists did not argue 
job vacancy for firms.3 He argued that 
monetary policy can do little to address 
labor market mismatch. Barlevy then 
showed how the same model can be used 
to calculate a bound on how much a 
shock to firms’ hiring ability affects 
unemployment. 
Assuming an initial unemployment rate 
of 5%, he argued that a hiring shock 
alone would have raised the unemploy-
ment rate by at most 2.1 percentage 
points. This shock can thus account 
for no more than 40% of the total in-
crease in the unemployment rate in the 
recent data—from 5% to 10.1%. Barlevy 
concluded that the other source of 
shocks in the model, the value of filling 
a job vacancy for firms, must have fallen 
relative to normal times to account for 
the high rate of unemployment. Unlike 
an increase in mismatch, a fall in the 
value of a filled job for employers may 
justify more accommodation from mon-
etary policymakers. However, Barlevy 
cautioned that to make the case for a 
more aggressive policy response, one 
must understand why filling job vacan-
cies now appears less valuable. 
Structural shocks
Andolfatto argued the recent data may 
be consistent with structural shifts play-
ing a larger role in contributing to high 
unemployment. He noted that since 
work by Abraham and Katz4 the telltale 
sign of a structural shock for economists 
has been a positive co-movement in 
unemployment and job vacancies (i.e., 
the unemployment and job vacancy rates 
increasing in tandem). But Andolfatto 
argued that a structural shock may ap-
pear not as a positive co-movement of 
the two, but as a Beveridge curve that 
appears flatter than in the past.
In particular, Andolfatto simulated struc-
tural shocks in a model economy devel-
oped by Mortensen.5 He found that 
unemployment and vacancies are neg-
atively correlated in the hypothetical 
economy, though the resulting slope 
of the curve relating the two is flatter 
when the economy is hit by aggregate 
demand shocks. Andolfatto then 
turned to unemployment and vacancy 
data from December 2000 through 
February 2011. Unlike other panelists, 
he constructed the 
unemployment rate 
relative to the U.S. 
adult population 
(aged 16 years and 
older), rather than 
just relative to the  
labor force. High-
lighting recent data, 
he argued that the 
unemployment– 
vacancies relation- 
ship during the Great   
Recession looks very 
much like a flatter 
Beveridge diagram 
(see figure 2). In fig-
ure 2, the line fit to 
data from December 
2007 through Febru-
ary 2011 is flatter 
than the one fitted 
to data from the  
earlier period. This 
indicates that even 
though the unem-
ployment and job  
vacancy rates did  
not rise in tandem  
in December 2007–
February 2011, the 
data still may be con-
sistent with structur-
al shocks. However,  
Andolfatto was  
careful to point  
out that his findings 
are meant to be sug-
gestive and require 
further research.     
Data measurement 
and match 
inefficiency
Christiano asked 
why the unemploy-
ment rate isn’t fall-
ing faster. He argued 
that the shocks that 
drive unemployment 
can be decomposed 
into two types: those 
due to insufficient aggregate  
demand and those due to inflexible  
labor markets. 
Christiano offered some arguments  
as to the role of these two shocks. He 
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0 2 4 6 8Charles­L.­Evans, President  ; Daniel­G.­Sullivan,­
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several­alternative­­
hypotheses­for­why­
the­value­of­a­filled­
job­might­now­be­
lower­than­usual.­
One­possibility­is­
worker–employer­
mismatch.­While­the­
other­panelists­inter-
preted­labor­market­
mismatch­to­mean­
difficulty­in­hiring,­
Hall­provided­another­
implication­of­mis-
match—namely,­that­
firms­may­still­end­up­
hiring­workers,­but­
ones­who­are­a­poor­
fit­for­their­jobs.­Firms­
therefore­expect­to­
earn­fewer­profits­
from­any­given­match,­
which­explains­why­
they­find­hiring­more­
workers­less­valuable.
Other­possibilities­for­why­the­value­of­
a­filled­job­is­lower­now­than­in­normal­
times­may­be­explained­by­what­Hall­
referred­to­as­the­“Old­New­Keynesian”­
view­and­the­“New­New­Keynesian”­view.­
In­the­“Old­New­Keynesian”­framework,­
“sticky”­product­prices­(i.e.,­prices­that­
do­not­adjust­as­quickly­as­they­would­in­
a­classical,­perfectly­competitive­market)­
are­too­high­during­a­recession­and­
thus­there­is­less­need­for­additional­
workers.­In­the­“New­New­Keynesian”­
view,­the­problem­is­not­sticky­product­
prices,­but­sticky­wages.­Wages­are­“too­
high,”­meaning­that­hiring­additional­
workers­is­less­profitable­than­during­
normal­times.­
Hall’s­last­explanation­for­why­the­value­
of­a­filled­job­is­lower­than­usual—which­
he­found­the­most­persuasive—is­what­
he­called­the­“Flexible­Unemployment­
Hypothesis.”­As­in­the­“New­New­
Keynesian”­view,­wages­do­not­fall­and­
might­even­rise­in­a­recession,­making­
hiring­more­costly.­However,­rather­than­
emerging­from­a­theory­where­wages­
are­somehow­“stuck”­at­too­high­a­level,­
this­hypothesis­arises­in­Mortensen-­
style­models­where­workers­and­firms­
bargain­over­wages­and­where­unem-
ployment­emerges­explicitly.­Hall­
pointed­out­that,­while­wages­may­be­
higher,­on­the­whole­workers­are­still­
worse­off­because­the­value­of­the­time­
spent­working­and/or­searching­for­a­
job­is­lower.­­
Sectoral mismatch
Violante­continued­the­discussion­of­
labor­market­mismatch­and­presented­
joint­work­with­Ayşegül­Şahin,­Joseph­
Song,­and­Giorgio­Topa,­all­from­the­
Federal­Reserve­Bank­of­New­York.­­
Violante­described­three­theories­on­why­
the­efficiency­of­the­process­matching­
unemployed­workers­with­job­vacancies­
has­fallen­since­the­Great­Recession.­One­
explanation­is­that­the­effort­unem-
ployed­workers­exert­when­job­hunt-
ing­has­fallen,­e.g.,­because­of­the­
extension­of­unemployment­insurance­
benefits.­Likewise,­employer­recruiting­
effort­may­have­fallen,­perhaps­be-
cause­of­increased­uncertainty­about­
future­profits.­
Violante­focused­on­a­third­explanation:­
sectoral­mismatch.­He­described­this­as­
a­situation­in­which­employers­looking­
to­hire­and­workers­looking­to­get­hired­
are­in­different­market­sectors­(e.g.,­in-
dustries,­occupations,­and­locations).­
that­inflexible­labor­markets­were­im-
portant­for­unemployment­to­the­same­
extent­as­they­do­now.­Christiano­also­
noted­that­the­decline­in­match­efficien-
cy­implied­by­the­data­is­40%,­which­is­
too­large­a­deterioration­to­be­rooted­
entirely­in­inflexible­markets.­He­sug-
gested­the­decline­may­be­biased­because­
of­composition­effects—e.g.,­changes­in­
the­shares­of­vacancies­posted­by­large­
versus­small­firms.­Larger­firms­tend­to­
post­more­vacancies­per­worker­hired,­
so­a­shift­in­hiring­toward­large­firms­
would­make­hiring­seem­less­efficient­
than­in­the­past.­If­shocks­to­credit­access­
particularly­hurt­small­firms,­as­seems­
to­have­been­the­case­during­the­Great­
Recession,­hiring­would­have­indeed­
shifted­to­large­firms.­
Flexible Unemployment Hypothesis
Hall­reexamined­why­the­value­of­a­filled­
job­for­firms­is­lower­now­than­before­the­
most­recent­recession.­He­noted­that­
worker­productivity­is­the­driving­force­of­
the­value­of­a­filled­job­in­the­Mortensen­
and­Pissarides­(1994)­framework,­but­that­
worker­productivity­rose­during­the­Great­
Recession,­so­low­productivity­could­not­
explain­why­firms­were­reluctant­to­take­
on­new­workers.­He­then­discussed­­
4. Impact of mismatch on U.S. unemployment
Note: See the text for further details.
SourceS: Gianluca Violante’s calculations based on the U.S. Bureau of Labor Statistics, 
unemployment rate data; and Conference Board, Help Wanted OnLine™ Data Series.
unemployment rate
U.S. unemployment rate
Counterfactual unemployment rate without industry mismatch
2001 ’02 ’04 ’05 ’06 ’07 ’08 ’09 ’10
4
5
6
7
8
9
10
11
’03That­is,­the­inability­to­learn­new­skills­
that­employers­are­looking­for­or­the­
inability­to­move­across­the­country­to­
where­jobs­are­located­may­lead­to­
high­unemployment.­Building­on­the­
framework­of­Mortensen­and­Pissarides­
(1994),­he­showed­how­the­across-sector­
dispersion­of­both­job­vacancies­and­
unemployed­workers­can­be­used­to­
measure­the­contribution­of­mismatch­
to­the­unemployment­rate.­
Violante­used­disaggregated­vacancy­
data­from­an­index­of­Internet­help-
wanted­postings­to­see­which­market­
sectors­vacancies­are­associated­with,­
and­he­used­unemployment­data­from­
the­U.S.­Bureau­of­Labor­Statistics­to­
see­which­sectors­unemployed­workers­
come­from.­With­these­data,­Violante­
quantified­the­contribution­of­sectoral­
mismatch­to­unemployment.­When­mar-
ket­sectors­correspond­to­U.S.­states,­
he­found­mismatch­contributed­almost­
nothing­to­the­overall­recent­rise­in­the­
unemployment­rate­from­5%­to­10.1%.­
When­market­sectors­instead­correspond­
to­industries,­mismatch­can­explain­15%,­
or­roughly­0.8­percentage­points,­of­the­
rise­in­the­unemployment­rate.­That­is,­
the­fact­that­firms­that­post­more­vacan-
cies­tend­to­be­in­industries­different­
than­those­where­unemployed­workers­
come­from­can­partly­explain­why­un-
employment­is­high.­Figure­4­shows­­
Violante’s­calculation­of­the­hypotheti-
cal­unemployment­rate­in­the­ideal­case­
in­which­unemployed­workers­could­
costlessly­move­to­the­industries­where­
firms­are­hiring.­In­figure­4,­this­coun-
terfactual­unemployment­rate­still­rises­
sharply,­implying­the­mismatch­between­
industries­where­firms­are­hiring­and­
where­unemployed­workers­last­worked­
can­explain­only­a­small­share­of­actual­
unemployment.­Finally,­when­market­
sectors­correspond­to­occupations,­mis-
match­between­the­occupations­firms­
are­seeking­to­fill­and­the­occupations­
the­unemployed­held­in­their­previous­
jobs­can­account­for­25%,­or­about­­
1.25­percentage­points,­of­the­rise­in­
the­unemployment­rate.­From­this,­­
Violante­concluded­that­the­diminished­
ability­of­firms­to­hire­new­workers­may­
indeed­have­contributed­to­unemploy-
ment,­but­that­most­of­the­recent­in-
crease­is­due­to­something­else.
Conclusion
Speakers­on­the­macroeconomic­policy­
panel­showed­how­Mortensen’s­research­
can­be­used­to­make­sense­of­phenomena­
such­as­persistent­high­unemployment.­
The­discussion­particularly­focused­on­
apparent­changes­in­the­efficiency­of­
the­matching­process­that­pairs­unem-
ployed­workers­with­job­vacancies.­Aside­
from­Andolfatto,­who­argued­that­the­
data­could­be­driven­mostly­by­shocks­to­
match­productivity,­the­panelists­con-
tended­that­the­contribution­of­match­
inefficiency­to­overall­unemployment­is­
important­but­cannot­by­itself­explain­
the­total­increase­in­unemployment­in­
the­wake­of­the­Great­Recession.
1­The­full­conference­agenda­and­some­pre-
sentations­from­other­panels­are­available­
at­www.econ.northwestern.edu/seminars/
mortensen-conference.html.
2­According­to­the­National­Bureau­of­
Economic­Research,­the­Great­Recession­
began­in­December­2007­and­ended­in­
June­2009.
3­Dale­T.­Mortensen­and­Christopher­A.­
Pissarides,­1994,­“Job­creation­and­job­­
destruction­in­the­theory­of­unemployment,”­
Review of Economic Studies,­Vol.­61,­
No.­3,­July,­pp.­397–415.­
4­Katharine­G.­Abraham­and­Lawrence­F.­
Katz,­1986,­“Cyclical­unemployment:­­
Sectoral­shifts­or­aggregate­disturbances?,”­
Journal of Political Economy,­Vol.­94,­
No.­3,­June,­pp.­507–522.
5­Dale­T.­Mortensen,­1992,­“Equilibrio­
de­búsqueda­y­ciclos­económicos­reales,”­
Cuadernos económicos de ICE,­No.­51,­
pp.­151–172.

Macroeconomic policy and labor markets: lessons from Dale Mortensen’s research

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Macroeconomic policy and labor markets: lessons from Dale Mortensen’s research

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