Mismatch Shocks and Unemployment During the Great Recession

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.