Mismatch Shocks and Unemployment During the Great Recession

Abstract

Summary We investigate the macroeconomic consequences of fluctuations in the effectiveness of the labor market matching process with a focus on the Great Recession. We conduct our analysis in the context of an estimated medium‐scale dynamic stochastic general equilibrium model with sticky prices and equilibrium search unemployment that features a shock to the matching efficiency (or mismatch shock). We find that this shock is not important for unemployment fluctuations in normal times. However, it plays a somewhat larger role during the Great Recession when it contributes to raise the actual unemployment rate by around 1.3 percentage points and the natural rate by around 2 percentage points. The mismatch shock is the dominant driver of the natural rate of unemployment and explains part of the recent shift of the Beveridge curve. Copyright © 2016 John Wiley & Sons, Ltd.

Sectoral Change and Unemployment During the Great Recession, in Historical Perspective

“…Furlanetto and Grosheny () explore the potential for fluctuations in job matching efficiency to understand unemployment by calibrating a New Keynesian model of employment fluctuations. They find that fluctuations in matching efficiency are nearly irrelevant during “normal times,” but raised unemployment by 1.25 percentage points during the Great Recession.…”

“…How large are these estimated effects compared to those estimated by others? Furlanetto and Grosheny () estimate that reduced matching efficiency increased unemployment by 1.25 percentage points on average since 2009. Both studies find that the effects of sectoral change are large in recession periods and small during normal times, and despite our different approaches, find similar estimated effects on unemployment during the Great Recession.…”

Human capital as a location factor: An empirical investigation of relocating firms and their labour force in the Netherlands

“…Some argue that the demand for human capital has decreased in the time of the great recession, as indicated by rising unemployment, and the statements from prior to the great recession overestimate how universal the human capital scarcity is (Lazear and Spletzer ; Rothstein ; Levine ; Hotchkiss et al ; Abraham ; Erken et al ). Others, however, view unemployment as structural rather than cyclical and having to do with skill mismatch rather than low aggregate demand (Estevão and Tsounta ; Daly et al ; Holzer ; Furlanetto and Groshenny ).…”

Relevance of education to occupation: a new empirical approach based on college courses

“…This is especially important since our results may partially reflect penalties associated with labor market dynamics in the wake of the 2007 financial crisis. Furlanetto & Groshenny (2016) and Zago (2015) find that skill mismatch has increased since the Great Recession.…”