Mismatch Shocks and Unemployment During the Great Recession

Abstract

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 DSGE 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.

Structural and Cyclical Forces in the Labor Market during the Great Recession: Cross-Country Evidence

“…The U.S. estimate is larger than the prior mean of 0.145, which is adapted from Silva and Toledo (2009). Our estimate confirms their finding, as well as those of Yashiv (2000) and Furlanetto and Groshenny (2012b), that post-match training costs are quantitatively more important than pre-match recruiting costs in the U.S. This is true also in the U.K. and Sweden, similar to the results in Christiano, Trabandt, and Walentin (2011) for Sweden.…”

A demand-driven search model with self-fulfilling expectations: the new ‘Farmerian’ framework under scrutiny

“…Demand-side explanations of the latest finance-induced recession have also been put forwards in other brand-new contributions. For instance, similar evidence for the US has been recently found by Furlanetto and Groshenny (2013). Specifically, exploiting a richer DSGE model featuring the traditional labour market frameworkà la Mortensen and Pissarides (1994), those authors find that the drop in output growth during the financial crisis was driven by increasingly negative risk premium shocks that according to their expected negative effects on the propensity to invest can be classified as demand disturbances.…”

“…harms the ability of the model to properly fit the other macroeconomic aggregates. 17 In fact, the theoretical intent of our model is to explain observed labour market dynamics while our empirical goal is to highlight how it properly captures such a dynamics. On the one hand, figure 2 shows fitted values (straight line) together with actual data (dotted line) as percent deviation from their respective steady-state references.…”

A Search and Matching Approach to Labor Markets: Did the Natural Rate of Unemployment Rise?

“…However, the increase in duration doubled, from about 18 weeks to about 35 weeks. However, the increase in duration 10 Our narrow focus on the direct behavioral effects of extended unemployment insurance ignores the potential aggregate demand stimulus provided by such benefi ts, which reduces the cyclical component of the unemployment rate but does not affect the level of structural unemployment. Some recent research suggests that multiplier effects of normal and extended unemployment insurance payments may be quite large (for example, Vroman 2010).…”