The matching function -a key building block in models of labor market frictions-implies that the job …nding rate depends only on labor market tightness. We estimate such a matching function and …nd that the relation, although remarkably stable over 1967-2007, broke down spectacularly after 2007. We argue that labor market heterogeneities are not fully captured by the standard matching function, but that a generalized matching function that explicitly takes into account worker heterogeneity and market segmentation is fully consistent with the behavior of the job …nding rate. The standard matching function can break down when, as in the Great Recession, the average characteristics of the unemployed change too much, or when dispersion in labor market conditions -the extent to which some labor markets fare worse than others-increases too much.JEL classi…cations: J6, E24, E32.

THE LABOR FORCE PARTICIPATION rate is defined as the percentage of the noninstitutional working-age population (those aged 16 and over) reporting themselves as either working or actively looking for work. This statistic is constructed from data collected as part of the Current Population Survey and published monthly by the Bureau of Labor Statistics (BLS). Its longer-run trend is an important determinant of the supply of workers to the U.S. economy. For much of the past four decades, the participation rate has trended upward, rising from less than 60 percent in the early 1960s to more than 67 percent by the late 1990s. However, after peaking at 67.3 percent in the first quarter of 2000, the participation rate fell steadily to under 66 percent by early 2005 and has edged up only to just above 66 percent since then. As figure 1 shows, such a decline in labor force participation is nearly unprecedented in the postwar experience. Although the upward trend between the mid-1960s and the mid-1990s was occasionally interrupted by relatively brief periods of little change, few episodes of persistent outright decline are evident in the data. Indeed, even after the upward trend from the earlier period is removed (using, for example, a Hodrick-Prescott filter

This paper presents a framework to interpret movements in the Beveridge curve and analyze unemployment ‡uctuations. We decompose the unemployment rate into three main components: (1) a component driven by changes in labor demand-movements along the Beveridge curve and shifts in the Beveridge curve due to layo¤s-(2) a component driven by changes in labor supply-shifts in the Beveridge curve due to quits, movements inand-out of the labor force and demographics-and (3) a component driven by changes in the e¢ ciency of matching unemployed workers to jobs. We …nd that cyclical movements in unemployment are dominated by changes in labor demand, but that changes in labor supply due to movements in-and-out of the labor force also play an important role. Further, cyclical changes in labor demand lead cyclical changes in labor supply. Changes in matching e¢ ciency generally play a small role but can decline substantially in recessions. At lowfrequencies, labor demand displays no trend, and changes in labor supply explain virtually all of the secular trend in unemployment since 1976.