Chapter 7 - Search in Macroeconomic Models of the Labor Market

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Abstract

This chapter assesses how models with search frictions have shaped our understanding of aggregate labor market outcomes in two contexts: business cycle fluctuations and long-run (trend) changes. We first consolidate data on aggregate labor market outcomes for a large set of OECD countries. We then ask how models with search improve our understanding of these data. Our results are mixed. Search models are useful for interpreting the behavior of some additional data series, but search frictions per se do not seem to improve our understanding of movements in total hours at either business cycle frequencies or in the long-run. Still, models with search seem promising as a framework for understanding how different wage setting processes affect aggregate labor market outcomes.

Section snippets

Cyclical Fluctuations

This section explores the ability of search models to explain the behavior of labor markets at business cycle frequencies. We break our analysis into three parts, mirroring the three ways that search may be important for macroeconomic models. First we update and extend labor market facts in an earlier volume of this Handbook (Lilien and Hall, 1986), highlighting the connection between those facts and the structure of search-and-matching models. We argue that search models offer a useful

Trends

We now shift our attention from cyclical fluctuations to long-run trends. The persistent, widespread, but unequal increase in unemployment across OECD countries in the 1970s and 1980s motivated a substantial body of research that sought to understand why different countries experienced different outcomes. This section reviews some of the key features of the low-frequency data and then examines how search theory has been used to understand these trend changes in labor market outcomes.

Conclusion

Our objective in this chapter has been to explore how the explicit introduction of search frictions into otherwise standard macroeconomic models affects our understanding of aggregate labor market outcomes in two different contexts. In our analysis of business cycles, we found that the search framework is useful for interpreting facts about unemployment and labor market flows. But we also found that search frictions tend to dampen fluctuations in output and employment without significantly

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    We are grateful for comments from Steven Davis, Robert Hall, Dale Mortensen, Christopher Pissarides, and the editors, for research assistance from Chris Herrington, and for financial support from the National Science Foundation.

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