What Drives Matching Efficiency? A Tale of Composition and Dispersion
Federal Reserve Board
Board of Governors of the Federal Reserve System - Macroeconomic Analysis Section
January 9, 2011
FEDS Working Paper No. 2011-10
This paper presents a framework to study movements in the matching efficiency of the labor market and highlights two observable factors affecting matching efficiency: (i) unemployment composition and (ii) dispersion in labor market conditions, the fact that tight labor markets coexist with slack ones. Using CPS micro data over 1976-2009, we find that composition is responsible for most of the movements in matching efficiency until 2006. In 2008-2009, only forty percent of an exceptionally low matching efficiency can be attributed to composition. New highly disaggregated data on vacancies and unemployment show that the unexplained decline in matching efficiency coincides with an increase in dispersion.
Number of Pages in PDF File: 44
Keywords: Matching Function, Matching Efficiency, Composition Effect, Mismatch
JEL Classification: J6, E24, E32Accepted Paper Series
Date posted: April 18, 2011
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