Working Paper: CEPR ID: DP3241
Authors: Melvyn G. Coles; Barbara Petrongolo
Abstract: A new methodology is described which tests between various equilibrium theories of unemployment using matching data. The Paper shows how to correct econometrically for temporal aggregation effects, where the econometrician?s aim is to identify a matching process using data which is recorded monthly, and also shows how to identify different unemployment theories on the data. As implementing this test requires information on the inflow of new vacancies over time, this Paper uses employment agency data for the UK over the period 1985-99.Although the standard random matching approach provides a reasonably good fit, the empirical evidence provides greater support for ?stock-flow? matching. Estimates find that over this period, around 87% of newly laid-off workers are on the long-side of their markets and so match with the flow of new vacancies as those vacancies come onto the market. In particular, these workers? experience average durations of unemployment which exceed 6 months and their matching rates are highly correlated with the inflow of new vacancies. This job queue interpretation of the matching data has important implications for government policy on long term unemployment and optimal UI. It also suggests that previous estimates of the so-called matching function have been misspecified, which potentially explains the large variation in results obtained in that literature.
Keywords: hypothesis testing; matching; unemployment
JEL Codes: E24; J41; J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| long side of the labor market (J29) | matching with the flow of new vacancies (J63) |
| previous estimates of the matching function (C51) | variability in results found in the literature (C90) |
| inflow of new vacancies (J69) | reemployment probabilities of unemployed workers (J68) |
| inflow of new vacancies (J69) | matching rates of newly unemployed workers (J65) |
| inflow of new vacancies (J69) | fit of the model (C52) |
| temporal aggregation (C41) | high correlation between observed monthly matches and inflow of new vacancies (J60) |