Search Frictions and Evolving Labour Market Dynamics

Christopher Martin, Bingsong Wang, Michael Ellington

Research output: Working paper

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Abstract

his paper puts Search Frictions models under novel empirical scrutiny and tests their ability to match empirical observations. To capture changing dynamics, we fit an extended Bayesian time-varying parameter VAR to US labour market data from 1962--2016. Our results show significant and important parameter change that is difficult to explain using standard theoretical models. We find that the key transmission mechanism in the Search Frictions model, a strong response of vacancies to productivity shocks, is not present in the data. This raises issues for the extensive debate on unemployment volatility. Our analysis uncovers that a shock to the cost of vacancy creation contributes substantially to the variation in labour market variables; and that these results hold for more sophisticated New Keynesian DSGE models.
Original languageEnglish
Number of pages26
Publication statusPublished - 2020

Keywords

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

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