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Estimating a search and matching model of the aggregate labor market

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Abstract

The search and matching model of the labor market has become the workhorse for analyzing unemployment dynamics and the business cycle transmission mechanism. However, many quantitative studies of the search and matching framework argue that it is unable to replicate key labor market facts. These studies typically rely on a wide range of calibrated parameter values for which independent information is difficult to obtain. In this article, I specify and estimate a simple version of the search and matching framework using Bayesian methods. I show that the model has extremely weak internal propagation and that labor dynamics are explained almost exclusively by shocks that are residuals in the respective equations. Moreover, the structural parameter estimates appear to be only weakly identified and can change considerably across minor specification changes. This suggests that the search and matching model may not be a good framework for explaining business cycle fluctuations in the labor market.

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  • Thomas A. Lubik, 2009. "Estimating a search and matching model of the aggregate labor market," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 95(Spr), pages 101-120.
    • Handle: RePEc:fip:fedreq:y:2009:i:spr:p:101-120:n:v.95no.2
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    2. Michael U. Krause & Thomas A. Lubik, 2010. "Instability and indeterminacy in a simple search and matching model," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 96(3Q), pages 259-272.
    3. Kuo, Chun-Hung & Miyamoto, Hiroaki, 2015. "Fiscal stimuli in the form of job creation subsidies," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 267-284.
    4. Cheremukhin, Anton A. & Restrepo-Echavarria, Paulina, 2014. "The labor wedge as a matching friction," European Economic Review, Elsevier, vol. 68(C), pages 71-92.
    5. Liu, Zheng & Miao, Jianjun & Zha, Tao, 2016. "Land prices and unemployment," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 86-105.
    6. Vasilev, Aleksandar, 2020. "Search and matching frictions and business cycle fluctuations in Bulgaria," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 19(3), pages 319-340.
    7. Kato, Ryuta Ray & Miyamoto, Hiroaki, 2013. "Fiscal stimulus and labor market dynamics in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 30(C), pages 33-58.
    8. Wesselbaum, Dennis, 2011. "Sector-specific productivity shocks in a matching model," Economic Modelling, Elsevier, vol. 28(6), pages 2674-2682.
    9. Lin, Ching-Yang & Miyamoto, Hiroaki, 2014. "An estimated search and matching model of the Japanese labor market," Journal of the Japanese and International Economies, Elsevier, vol. 32(C), pages 86-104.
    10. Julien Albertini & Güneş Kamber & Michael Kirker, 2012. "Estimated Small Open Economy Model With Frictional Unemployment," Pacific Economic Review, Wiley Blackwell, vol. 17(2), pages 326-353, May.
    11. Wesselbaum, Dennis, 2019. "Jobless recoveries: The interaction between financial and search frictions," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    12. Furlanetto, Francesco & Groshenny, Nicolas, 2016. "Reallocation shocks, persistence and nominal rigidities," Economics Letters, Elsevier, vol. 141(C), pages 151-155.
    13. Wesselbaum, Dennis, 2015. "Sectoral labor market effects of fiscal spending," Structural Change and Economic Dynamics, Elsevier, vol. 34(C), pages 19-35.
    14. Avcioglu, Sahin & Karabay, Bilgehan, 2019. "Search efficiency, wage dynamics and welfare," Economic Modelling, Elsevier, vol. 83(C), pages 270-286.
    15. Camilo Morales-Jimenez, 2022. "Dynamic and Stochastic Search Equilibrium," Finance and Economics Discussion Series 2022-018, Board of Governors of the Federal Reserve System (U.S.).
    16. Sylvain Leduc & Zheng Liu, 2016. "The slow job recovery in a macro model of search and recruiting intensity," Working Paper Series 2016-9, Federal Reserve Bank of San Francisco.

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    Business cycles; Labor market;

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