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A search and matching approach to business-cycle migration in the euro area

A search and matching approach to business-cycle migration in the euro area

This paper proposes a new approach to model the fluctuation of migration and un- employment over the business cycle in a two-country setting. In particular, we focus on search and matching frictions as sources of unemployment. By starting with a summary of the empirical evidence on euro area migration patterns, we find internal migration to have increased over time, and be mostly work-related and of temporary nature. Our subsequent empirical analysis of bilateral migration and macroeconomic data over the years 1980-2010 supports this notion. We present several key business cycle facts for the EA-12 that provide evidence for business cycle related fluctuations in net migra- tion flows and the crucial role of unemployment differentials in shaping intra-euro area migration patterns. On average, we find a negative correlation of the net migration rate with both, the unemployment and the wage differential, at various lags and leads. Additionally, we find a positive correlation with respect to vacancies which lead net mi- gration over the cycle. We interpret this as evidence for the importance of the relative labor market tightness for net migration flows.
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Search and matching frictions and business cycle fluctuations in Bulgaria: Technical Appendix

Search and matching frictions and business cycle fluctuations in Bulgaria: Technical Appendix

Search and matching frictions and business cycle fluctuations in Bulgaria: Technical Appendix Suggested Citation: Vasilev, Aleksandar (2016) : Search and matching frictions and business cycle fluctuations in Bulgaria: Technical Appendix, ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft, Kiel und Hamburg

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Testing the importance of search frictions and matching through a randomized experiment in Jordan

Testing the importance of search frictions and matching through a randomized experiment in Jordan

female workers for these positions. Appendix 1 describes in more detail this listing process. Firms of this size typically do not have human resource departments and have less experience hiring workers than large companies. As such, we might expect search and matching costs to be higher for such firms. Indeed, in our survey of these firms, 60 percent say they have difficulty distinguishing between good and bad candidates. We stratified these firms by sector (commercial or industrial), whether or not the firm had recently hired a worker, whether or not the firm had previously hired a female fresh graduate, and by the number of female employees in the firm (0, 1 to 10, 10 or more). Within these 24 strata, we then randomly assigned half the firms to treatment, which would be attempted to be matched to job candidates, and half to control, which would not. This gave a treatment group of 1,137 firms and a control group of 1,142 firms, with a mean size of 17 workers and a mean annual hiring rate of 1.6 workers per firm (Appendix 1). After no hires occurred in a first phase, the control group was also offered the treatment, and a secondary booster sample of 175 larger firms that were potentially interested in hiring workers through the program was added. Appendix 1 details how these were chosen. These larger firms would typically be viewed as more prestigious by graduates.
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Technological Unemployment Revisited: Automation in a Search and Matching Framework

Technological Unemployment Revisited: Automation in a Search and Matching Framework

tion into the modern search and matching theory of frictional unemployment based on Mortensen and Pissarides (1994) and Pissarides (2000). Assuming that low-skilled workers are easier to substitute than high-skilled workers, which is the empirically relevant case up to now, we show that automation leads to higher equilibrium wages of high-skilled workers and to a tighter high-skilled labor market. The reverse holds true for low-skilled workers. As a consequence, unemployment of low-skilled workers rises, while unemploy- ment of high-skilled workers falls. In order to derive quantitative results and to investigate how overall unemployment reacts to automation, we calibrate the model to German data. Surprisingly, it can be shown that overall unemployment even decreases with automa- tion, as fewer low-skilled manufacturing jobs get destroyed than high-skill manufacturing jobs are created. This is consistent with another recent contribution within a search and matching model of employment (Guimar˜ aes and Mazeda Gil, 2018) and with empirical evidence showing that more jobs have been created due to automation in major OECD countries than have been destroyed (Autor and Salomons, 2017, 2018; Gregory et al., 2018).
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Fiscal multipliers in a two-sector search and matching model

Fiscal multipliers in a two-sector search and matching model

In light of the above, we build a business cycle model with search and matching frictions that lead to sectoral unemployment. To capture the above empirical observations, we …rst assume that unskilled workers cannot become skilled. Instead, skilled workers work in skilled jobs and, if unemployed, search for employment in the skilled sector. Similarly, unskilled workers work in unskilled jobs, and if unemployed, search for employment in the unskilled sector. Second, we assume that the production structure allows for skill- biased technical change and, in particular, is characterised by capital-skill complementarity. This setup has been shown to explain key characteris- tics of the skill premium in the data, both in terms of its evolution over the past several decades (see e.g. Katz and Murphy (1992), Krusell et al. (2000) and He (2012)) as well as over the business cycle (Lindquist (2004) and Pourpourides (2011)). The search and matching mechanism for employ- ment creation that we employ follows the benchmark Mortensen-Pissarides framework with the wage being determined via Nash bargaining. Moreover, our setup allows for di¤erentiation between the two labour markets, such as di¤erences in relative bargaining power, job separation rates and job posting costs to re‡ect the empirical observations outlined above.
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Testing the Importance of Search Frictions, Matching, and Reservation Prestige Through Randomized Experiments in Jordan

Testing the Importance of Search Frictions, Matching, and Reservation Prestige Through Randomized Experiments in Jordan

9 1011 to the treatment group. In order to avoid John Henry and Hawthorne effects, job candidates were not informed as to which group they were assigned. 3 Table 1 summarizes some basic characteristics of the job candidates by treatment status. The average participant is 23.5 years old, and graduated three-quarters of a year before participating in our program. 59 percent are female, 81 percent are university graduates and 19 percent community college graduates. The most common majors are accounting and business, engineering, and computing and information technology. The last column shows randomization has succeeded in generating balance on background characteristics, on the tawjihi score (the end of high school exam), and on the different test measures to be described below. The only variable which shows imbalance is whether they are a university versus a community college graduate. Since this is one variable out of nineteen in the Table, it appears likely to be due to chance. The firm sample consists of a primary, experimental sample, and a secondary, booster, sample. The experimental sample consists of 2,279 small and medium firms, who were selected via a listing survey that screened firms according to whether they planned on hiring a worker in the next six months, and whether they would consider young workers and female workers for these positions. Appendix 1 describes in more detail this listing process. Firms of this size typically do not have human resource departments, and have less experience hiring workers than large companies. As such, we might expect search and matching costs to be higher for such firms. Indeed, in our survey of these firms, 60 percent say they have difficulty distinguishing between good and bad candidates.
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Tax reforms in search-and-matching models with heterogeneous agents

Tax reforms in search-and-matching models with heterogeneous agents

First, in a model with search and matching frictions, the tax reform considered is Pareto improving in the long run although it increases inequality between agents. In other words, all the agents are better o¤, despite higher welfare gains for the capitalists compared to the workers. However, the capital tax cut met with the labour tax increase hurts the workers and also worsens the aggregate welfare in the transition period. This is because the positive e¤ects resulting from higher capital accumulation take time to be realized. As a result, the combination of an initially lower net wage rate and higher search-unemployment creates short-run losses for the workers and aggregate economy, which are reversed in the long run. We also show that our results are robust to variations in the relative bargaining power of workers in the Nash bargain. Increasing the workers’bargaining power makes the tax reform less e¢ cient in terms of welfare improving.
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A Real-Business-Cycle model with search-and-matching frictions and efficiency ("fair") wages

A Real-Business-Cycle model with search-and-matching frictions and efficiency ("fair") wages

In this paper we combine two important ingredients - search and matching frictions and ”fair wages,” and investigate their combined quantitative importance in explaining fluc- tuations in Bulgarian labor markets. Overall, the calibrated real-business-cycle model for Bulgaria after the introduction of the currency board, when featuring both search- and-matching frictions, and reciprocity in labor relations, performs better vis-a-vis data, and in addition dominates the model with search frictions only (Vasilev 2016a), and setups with efficiency wages alone (Vasilev 2017a,b). The search and matching mechanism captures the volatility of unemployment, while the efficiency wage mecha- nism fits better the cyclicality of the wage rate.
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Technological unemployment revisited: Automation in a search and matching framework

Technological unemployment revisited: Automation in a search and matching framework

model. In Section 4, we derive our analytical results, and in Section 5, we conclude, draw potential lessons for policy makers, and discuss promising future research avenues. 2 Related Literature Our paper builds upon the literature on automation and the search and matching theory of the labor market. As far as automation is concerned, Steigum (2011) and Prettner (2018) augment the standard neoclassical growth models of Solow (1956), Cass (1965), and Koopmans (1965) by a production factor that is a perfect substitute for labor, while it is accumulated similar to physical capital. They show that this automation capital has the potential to lift an economy out of the traditional stagnation steady state even in the absence of technological progress. The reason is that automation capital makes the production factor labor accumulable such that the Cobb-Douglas production technology is transformed endogenously into an AK production technology. Thus, the possibility for long-run economic growth emerges in the neoclassical growth model, which has consider- able consequences for welfare in the long run.
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Supplier search and re-matching in global sourcing: Theory and evidence from China

Supplier search and re-matching in global sourcing: Theory and evidence from China

While this basic formalization of the search-and-matching process is similar as in Defever et al. (2016), we consider two important generalizations in this chapter. First, rather than just assuming two supplier types (with high and low unit costs) as in that paper, we work here with a general function g(c) that describes how unit costs are distributed across the mass of potential suppliers in the economy. Second, and even more importantly, we elicit the role of uncertainty when the firm searches for a new partner, and encounters a candidate supplier in its random search. The firm may or may not be able to infer the efficiency of this candidate before definitively giving up its previous match; if it is able to do so, it can separate the processes of search and re-matching, and decide to stick with its old partner if the encountered candidate is not more efficient than its current match. When the candidate’s efficiency is only revealed after the first round of interaction, however, the firm will always re-match when it decides to search, and this corresponds to Rauch’s notion of trial-and-error search for component suppliers. It turns out that both model versions, with search and re-matching being separable or non- separable, give rise to one specific prediction that we establish in Propositions 2 and 2’ below. Namely, we show that the firm in our model tends to search more if the distribution g(c) is more dispersed. 3 The intuition is that, with more dispersion, more highly efficient matches are out there in the population of candidate suppliers, which in turn makes searching more attractive. In the final section of this chapter, we then aim to address the empirical relevance of this novel theoretical prediction. The main challenge we are facing here is data availability. Our the- ory is about particular matches of domestic buyers and foreign suppliers, but current data only very rarely allows observing such matches. A notable exception is the paper by Eaton, Eslava, Jinkins, Krizan and Tybout (2014) who are able to construct pairs of Colombian exporting firms and their importers in the United States. They show that most exporters contract only with a single importing partner, thus suggesting that most trade is indeed relationship-specific. Moreover, they find considerable variation in relationship durations in the data, pointing to a co-existence of long-term and one-shot collaborations in that market. More recent studies which also use proprietary Census data on matches of US importers and foreign exporters include Monarch (2015) and Kamal and Tang (2015).
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Optimal fiscal policy in a model with search-and-matching frictions: the case of Bulgaria (1999-2018)

Optimal fiscal policy in a model with search-and-matching frictions: the case of Bulgaria (1999-2018)

6 Conclusions This paper explores the effects of fiscal policy in an economy with search and matching fric- tions in the labor market, consumption taxes, and a common income tax rate in place. To this end, a dynamic general-equilibrium model with government sector is calibrated to Bulgarian data (1999-2018). Two regimes are compared and contrasted - the exogenous (observed) vs. optimal policy (Ramsey) case. The focus of the paper is on the relative importance of consumption vs. income taxation, as well as on the provision of utility-enhancing public services. Bulgarian economy was chosen as a case study due to its major dependence on consumption taxation as a source of tax revenue. The main findings from the computational experiments performed in the paper are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides the optimal amount of the utility-enhancing public services, which are now three times lower; (iii) The optimal steady-state consumption tax needed to finance the optimal level of government spending is 18.7%, slightly lower than the rate in the exogenous policy case.
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Fiscal Multipliers in a Two-Sector Search and Matching Model

Fiscal Multipliers in a Two-Sector Search and Matching Model

In light of the above, we build a business cycle model with search and matching frictions that lead to sectoral unemployment. To capture the above empirical observations, we …rst assume that unskilled workers cannot become skilled. Instead, skilled workers work in skilled jobs and, if unemployed, search for employment in the skilled sector. Similarly, unskilled workers work in unskilled jobs, and if unemployed, search for employment in the unskilled sector. Second, we assume that the production structure allows for skill- biased technical change and, in particular, is characterised by capital-skill complementarity. This setup has been shown to explain key characteris- tics of the skill premium in the data, both in terms of its evolution over the past several decades (see e.g. Katz and Murphy (1992), Krusell et al. (2000) and He (2012)) as well as over the business cycle (Lindquist (2004) and Pourpourides (2011)). The search and matching mechanism for employ- ment creation that we employ follows the benchmark Mortensen-Pissarides framework with the wage being determined via Nash bargaining. Moreover, our setup allows for di¤erentiation between the two labour markets, such as di¤erences in relative bargaining power, job separation rates and job posting costs to re‡ect the empirical observations outlined above.
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Public-Sector Employment in an Equilibrium Search and Matching Model

Public-Sector Employment in an Equilibrium Search and Matching Model

6 Conclusion In this paper, we have developed a search-and-matching model to analyze the interaction between labor markets in the private and public sectors. The focus of our model is on distributional questions. What types of workers sort into the two sectors? How do the size of the public sector and the public sector’s wage and employment policies a¤ect the distribution of wages in the private sector and in the public sector? Given this focus, worker het- erogeneity is a key element of our model. We calibrate our model using Colombian data. Colombia is an interesting case study because the wage di¤erential between the public and private sectors there is very large. Our calibration and counterfactual experiments are motivated by a desire to dif- ferentiate among various potential explanations of this wage gap. Although there is a pure public-sector premium in Colombia, it is small relative to the di¤erential that needs to be explained. Instead, the primary cause of the public-private wage di¤erential in Colombia is that more highly edu- cated workers, who tend to be more productive regardless of whether they are employed in the private or public sector, get di¤erentially sorted into public-sector employment. A relatively minor aspect of this sorting is that there is rationing of public-sector jobs. More importantly, public-sector em- ployment is unstable for the least educated workers but extremely stable for highly educated workers. Much more so than in the private sector, when a highly educated worker gets a public-sector job, he tends to keep that job for a very long time.
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Search and matching frictions and business cycle fluctuations in Bulgaria

Search and matching frictions and business cycle fluctuations in Bulgaria

The paper proceeds to evaluate the quantitative importance of search and matching fric- tions in the case of the Bulgarian business cycle after the introduction of the currency board arrangement, which, when complemented with other reforms, brought aggregate stability to the economy. Those real rigidities in the labor markets introduce history dependence in the employment status, which makes employment, unemployment, and output more per- sistent. Such real rigidities in the labor market could be thus regarded as a qualitatively important propagation mechanism that can replicate data behavior, especially along the la- bor market dimension. Overall, the search and matching model, and the trade frictions in particular, generates persistence in output and both employment and unemployment, and is able to respond to the criticism in Nelson and Plosser (1992), Cogley and Nason (1995) and Rotemberg and Woodford (1996), who argue that the RBC model does not have a strong internal propagation mechanism besides the strong persistence in the TFP process. As in Andolfatto (1996), incorporating search and matching frictions leads to labor productivity in the model leading employment over the business cycle, which is what we observe in data as well. The very low dynamic correlation between wages and employment in Bulgaria is well-approximated in the model, mostly due to the fact that the wage rate is determined through Nash-bargaining procedure. Finally, the dynamic correlation between vacancies
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What account for the differences in rent-price ratio and turnover rate? A search-and-matching approach

What account for the differences in rent-price ratio and turnover rate? A search-and-matching approach

Another common approach is to use principal component (PC) analysis, which “com- bines” different variables into a few “factors” or PCs. We can then use those PCs as the right hand side variables to control for differences across RED. However, a prerequisite of adopting the PC analysis is that those variables are significantly cor- related, and that a few variables can summarize most of the total variations (Jolliffe, 2005). Unfortunately, this is not the case in our sample. It takes six PCs to account for 80% of the total variations, as shown in the appendix, and hence adopting the PC analysis would not be helpful in our context. Furthermore, neither the hedonic nor PC approach provides an empirical proxy for  An alternative approach is required. The starting point of our approach is the observation that variations in the fraction of owner-occupants, in the probability of good match and in housing attributes can be interpreted as changes in particular popularity measures. For instance, a RED that is more popular (i.e. has some good features) would attract more owner-occupants. Since owners tend to stay longer than renters, we would observe less turnover on average. On the other hand, a RED with a high matching probability means that, other things being equal, the housing units are more liquid. This attracts investors and increases the popularity of the RED. Similarly, as the number of households targeting each submarket is normalized to unity,  can be interpreted as the relative demand for housing in a certain submarket. Thus, the smaller  is, the stronger the relative demand for residence in a particular submarket. Obviously, the more desirable the structural and neighborhood attributes are, the greater the demand for the RED, and hence a smaller  and a higher popularity. Accordingly, we can summarize the major implications of the search and matching model (from (24) to (26)) as follows:
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Existence of Steady-State Equilibria in Matching Models with Search Frictions

Existence of Steady-State Equilibria in Matching Models with Search Frictions

5. Discussion We have dispensed with uniqueness requirements used in previous proofs of the existence of steady-state equilibria in matching models with search frictions, thus enlarging the range of models for which existence can be shown. Some further extensions are easy to come by. For instance, our analysis carries over to a discrete—rather than continuous—time model without substantive changes. While we have considered infinitely lived agents who return to search whenever their current match is dissolved, our results are also applicable to an equivalent model with a stationary inflow of finitely lived agents (Eeckhout, 1999). Other extensions, e.g., allowing for a continuum of types or search by matched agents, require more work.
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Frictions or deadlocks? Job polarization with search and matching frictions

Frictions or deadlocks? Job polarization with search and matching frictions

jobs downward (upward). The sharp increase in θ S compensates for the negative response of θ R resulting from the structural change. In the United States, market adjustments through changes in θ, provide strong signals for low-to- middle-ability routine workers to switch occupations. Unemployed workers in the routine sector with high abilities enjoy generous UB, which deters them from changing occupations and accessing service jobs. Furthermore, as shown by panel b., the bargained wages for movers are low because these individuals accept a reduction in their reservation wage today to enjoy better market conditions once experienced in the service sector. This fact explains why the labour market tightness in these jobs is the highest until η = η(7). The implied low unemployment duration and expectation of career progression, are then able to attract new workers, from η = η(3) to η = η(7), despite the losses in instantaneous wages. These wage losses are reported in panel b. of Figure 3: they range from 3% to 10%. This finding is consistent with the range of wage losses after changing from routine to service occupations, as estimated by Cortes (2015) using US data. The Nash bargaining rule leads to enough wage flexibility to allow for wage cuts. These wage cuts prevent endogenous job destructions and create new jobs at the bottom of the wage distribution.
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Evaluating search and matching models using experimental data

Evaluating search and matching models using experimental data

It is also worth emphasizing that our model test involves a direct test of a partial equilibrium version of the model. The reason for this is simple: the social experiment is conducted on a small sample of individuals and therefore does not have spillover effects on the rest of the economy. As such, we do not have a direct test of the equilibrium implications of the potential policy change. That said, we take the fact that the partial equilibrium version of the model passes our more rigorous test as very convincing evi- dence in favor of using the model for British Columbia (but not for New Brunswick), as the model can replicate many of the outcomes produced by a social experiment with- out the use of the variation introduced by the social experiment. This finding increases our confidence in equilibrium policy evaluations and the evaluation of potential policies that can be conducted within the model but were not conducted within the experiment. In a companion paper (Lise et al. 2004) we use the model presented here to evaluate the potential spillover effects that may arise should the SSP be implemented as a policy on a wide scale for British Columbia. Lise et al. (2004) find that several important feedback effects, including displacement and changes in the equilibrium wage distribution, reverse the cost-benefit conclusions implied by the partial equilibrium experimental evaluation. Taken together, both papers illustrate that combining social experiments and models of the labor market and government assistance programs represents a powerful tool for policy evaluation.
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Describing the Dynamics of Distribution in Search and Matching Models by Fokker-Planck Equations

Describing the Dynamics of Distribution in Search and Matching Models by Fokker-Planck Equations

them as outcomes of the employment-wealth-process started at an even earlier time, or because there is some intrinsic uncertainty in measuring a (t) (see below in sect. 5.2.3). Let us now step back and ask how this approach can be applied to other se- tups. If one would like to understand the process of accumulation and depreciation of skills and experience during di¤erent employment states, one would have to specify a di¤erential equation for skill similar to the budget constraint (2). Joint with the fundamental process (1) one could then derive Fokker-Planck equations for densities. If one would like to model the endogenous distribution of entitlement to unemploy- ment bene…ts, one would have to “translate”regulations concerning entitlement into a di¤erential equation, add again (1) and proceed to derive Fokker-Planck equations. Similar procedures are possible for analysing distributions over the business cycle where some aggregate shock process would be added to (2), (1) or both.
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International propagation of financial shocks in a search and matching environment

International propagation of financial shocks in a search and matching environment

hypothesis may explain only part of the financial contagion in the floating exchange rate world. This paper thus provides an alternative explanation to the output co- movement puzzle. It features a two-country model in which financial conta- gion arises, despite a flexible exchange rate system and substitutable financial assets, contrary to the open-economy literature under these two conditions. This results from the use a new type of financial shocks, increasing com- mercial banks’ capitalization costs independently of the liquidity supply in the economy. By weakening the resources of the banking sector, this shock creates credit rationing at home. However, it reflects a lower utilization of available savings in the economy rather than a massive increase in the cost of capital. Thereby, the exchange rate does not necessarily appreciate, so that the traditional price competitiveness effect is weakened here compared to standard monetary contractions. Meanwhile, the substitutability between home and foreign financial assets helps propagate the crisis by equalizing external finance conditions worldwide.
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