Labor Matching Model: Putting the Pieces Together

The original Mortensen-Pissarides model possesses two elements that are absent from the commonly used simplified version: the job destruction margin and training costs. I find that these two elements enable a model driven only by productivity shocks to simultaneously explain most of the movements in unemployment, vacancies, job destruction, job creation, the job finding rate and wages. The role of the job destruction margin in propagating productivity shocks is to create an additional pool of unemployed at the very beginning of a recession. The role of training costs is to explain the simultaneous decline in vacancies.