Working Paper: CEPR ID: DP7283
Authors: Alessio J.G. Brown; Christian Merkl; Dennis J. Snower
Abstract: This paper presents a theory explaining the labor market matching process through microeconomic incentives. There are heterogeneous variations in the characteristics of workers and jobs, and firms face adjustment costs in responding to these variations. Matches and separations are described through firms' job offer and firing decisions and workers' job acceptance and quit decisions. This approach obviates the need for a matching function. On this theoretical basis, we argue that the matching function is vulnerable to the Lucas critique. Our calibrated model for the U.S. economy can account for important empirical regularities that the conventional matching model cannot.
Keywords: Adjustment costs; Employment; Firing; Incentives; Job acceptance; Job offers; Matching; Quits; Unemployment
JEL Codes: E24; E32; J63; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| microeconomic incentives (D47) | matching outcomes (C52) |
| calibrated model (C51) | key empirical regularities (D81) |
| variations in incentives (M52) | labor market outcomes (J48) |
| job finding rate (J68) | unemployment rate (J64) |
| job creation (J68) | job destruction (J63) |