Heterogeneity and Cyclical Unemployment
37 Pages Posted: 21 Jul 2009 Last revised: 11 Aug 2009
Date Written: July 2009
We model worker heterogeneity in the rents from being employed in a Diamond-Mortensen-Pissarides model of matching and unemployment. We show that heterogeneity, reflecting differences in match quality and worker assets, reduces the extent of fluctuations in separations and unemployment. We find that the model faces a trade-off--it cannot produce both realistic dispersion in wage growth across workers and realistic cyclical fluctuations in unemployment.
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