Search Frictions and Evolving Labour Market Dynamics

Michael Ellington, Christopher Martin, Bingsong Wang

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Abstract

This paper puts Search Frictions models under novel empirical scrutiny. To capture changing dynamics, we fit a Bayesian time-varying parameter VAR to US labour market data from 1965–2016. Using a DSGE model with Search Frictions, we identify several structural shocks, including a shock to worker bargaining power that we name a wage shock. We argue that the wage shock is a key driver of cyclical variation, explaining a higher proportion of the variation of these variables than productivity, demand or job separation shocks. We also document stark differences between empirical and theoretical impulse response functions that cast doubt on the core transmission mechanism of search and matching models.

Original languageEnglish
Article number104104
Number of pages26
JournalJournal of Economic Dynamics and Control
Volume127
Early online date21 Apr 2021
DOIs
Publication statusPublished - 30 Jun 2021

Keywords

  • real wages
  • search frictions
  • time-varying parameter model

ASJC Scopus subject areas

  • Control and Optimization
  • Applied Mathematics
  • Economics and Econometrics

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