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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.JEL: E20, E32, J22, J63, J64.

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.

We propose a parsimonious matching model where a person's choice of whom to meet endogenizes the degree of randomness in matching. The analysis highlights the interaction between a productive motive, driven by the surplus attainable in a match, and a strategic motive, driven by reciprocity of interest of potential matches. We find that the interaction between these two motives differs with preferences-vertical versus horizontal-and that this interaction implies that preferences recovered using our model can look markedly different from those recovered using a model where the degree of randomness is not endogenous. We illustrate these results using data on the U.S. marriage market and show that the model can rationalize the finding of aspirational dating.