A Search and Matching Approach to Labour Markets

Vista previa del material en texto

A Search and Matching Approach to Labour Markets: Did the Natural Rate of Unemployment Rise?
1. The Equilibrium Natural Rate of Unemployment in a Search Model
ENR. Average rate of unemployment that would prevail in the absence of business cycle fluctuations. Underlying the natural rate is frictional unemployment, which reflects the normal time that the unemployed spend in job search, and structural unemployment, which reflects mismatches between employers’ labour demand and the skills and geographic location of the unemployed.
The NR is primarily determined by the characteristics of workers and the efficiency of the labour market matching process. These factors affect the rate at which jobs are simultaneously created and destroyed, the rate of turnover in particular jobs, and how quickly unemployed workers are matched with vacant positions.
	It is reasonable to ask whether some of these noncyclical factors have been altered in a way that increases the natural rate of unemployment. 
a. Frictional Unemployment in Equilibrium
To assess the factors affecting the unemployment rate, we rely on the model of equilibrium frictional unemployment from Pissarides. In this model, equilibrium unemployment is determined by the intersection of two curves: the Beveridge curve (BC), which depicts a negative relationship between vacancies (job openings) and the unemployment rate, and the job creation curve (JCC), which reflects employers’ decisions to create job openings and can loosely be interpreted as an aggregate labour demand curve.
In labour market models with search frictions,
	Not every employer that is looking to hire finds a worker, and not every job searcher finds an employer. Therefore, the labour market does not fully clear in each period, and some job openings remain unfilled at the same time that some job seekers remain unemployed. 
	Because employers and job seekers each benefit from a job match, wages are determined by the bargain between employers and employees over the surplus generated by the match, which occurs after the match.
	So the equilibrium is defined in terms of vacancies and unemployment – the intersection of the BC and JCC – rather than wages and the equilibrium level of employment.
Useful to review the determinants of each curve separately (equilibrium combination of vacancies and unemployment).
The Beveridge curve.
	Job vacancy rate. Constructed (analogous to the unemployment rate) as a ratio of the number of vacancies to the sum of the total employed plus the number of vacancies. 
Movement along the BC reflects cyclical changes in aggregate labour demand: for example, as labour demand weakens, vacancies decline and the unemployment rate rises, causing movement towards the lower right.
An outward shift in its overall position reflects a decline in the efficiency of the job matching process: for a given level of vacancies, workers have more trouble finding acceptable jobs, and for a given level of unemployment, firms have more trouble finding suitable workers. Reduced matching efficiency will raise the frictional or structural level of unemployment, hence the natural rate of unemployment. 
The job creation curve.
	Determined by firms’ recruiting behaviour. 
	Firms hire workers to produce output and will create vacancies up to the point where the expected value of a job match equals the expected search cost to fill the vacancy. The expected value of a job match is determined by the marginal product of labour. The expected search cost combines firms’ direct recruiting expenses with the probability that a job is filled. 
The probability of filling a job rises with the unemployment rate. Thus, the job creation curve is upward slopping, implying that firms create more job openings when unemployment is higher. Its slope depends on the structure of the product and labour markets in which firms operate and how they bargain over wages, as well as external factors such as the discount or interest rate. 
Changes in the expected value of a job associated with changes in the marginal product of labour can shift the job creation curve. This is a channel through which shifts in aggregate demand can affect the unemployment rate when the efficiency of the job matching process is unchanged. 
	Recessions (example). Declines in aggregate demand reduce the marginal product of labour, which reduces the value of creating jobs. This causes the JCC to rotate down, resulting in a higher unemployment rate with no shift in the Beveridge curve. Although this decline in aggregate demand increases measured unemployment, it does not raise the natural rate of unemployment. 
Key implication of this model.
	The equilibrium unemployment rate is determined jointly by the intersection of the Beveridge curve and the job creation curve.