Island Matching

29 Pages Posted: 9 Aug 2007 Last revised: 23 Apr 2021

See all articles by Dale T. Mortensen

Dale T. Mortensen

Northwestern University - Department of Economics; IZA Institute of Labor Economics

Date Written: August 2007

Abstract

A synthesis of the Lucas-Prescott island model and the Mortensen- Pissarides matching model of unemployment is studied. By assumption, all unmatched workers and jobs are randomly assigned to islands at the beginning of each period and the number of matches that form on a particular island is the minimum of the two realizations. When calibrated to the recently observed averages of U.S. unemployment and vacancy rates, the model fits the observed vacancy-unemployment Beveridge relationship very well and implies an implicit log linear relationship between the job finding rate and the vacancy-unemployment relationship with an elasticity near 0.5. The constrained efficient solution to the model is decentralized by a equilibrium outcome in which wages on each island are determined by a modified auction. Although the efficient solution explains only about 25% of the observed volatility in the U.S. vacancy-unemployment ratio, an equilibrium outcome in which wages are determined as the solution to a strategic bargaining game explains almost all of it.

Suggested Citation

Mortensen, Dale T., Island Matching (August 2007). NBER Working Paper No. w13287, Available at SSRN: https://ssrn.com/abstract=1005327

Dale T. Mortensen (Contact Author)

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8230 (Phone)
847-491-7001 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
27
Abstract Views
429
PlumX Metrics