The Flow Approach to Labor Markets

17 Pages Posted: 18 Apr 2007

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Peter J. Diamond

New York University (NYU) - School of Continuing and Professional Studies (SCPS)

Date Written: February 1992

Abstract

The "flow approach" to labor markets builds up from the flows of workers and of jobs. It is based on three essential components, a specification of labor demand in terms of flows of job creation/destruction, a process of matching between workers and firms, and a process of wage determination where wages depend on the labor market prospects of employed workers and firms, We think that this approach gives the right basic picture of unemployment and unemployment dynamics, and of the relation between wage movements and the state of the labor market. The additional richness it naturally delivers also captures important implications of labor market mechanisms for macroeconomics. Finally, its structure is realistic enough to allow for a productive interaction with - and use of - micro-work and micro-evidence in both labor and product markets. This paper shows the structure of the approach and some of its implications. The first section develops a barebone model; the second adds the flesh.

Suggested Citation

Blanchard, Olivier J. and Diamond, Peter J., The Flow Approach to Labor Markets (February 1992). NBER Working Paper No. w4000. Available at SSRN: https://ssrn.com/abstract=980913

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Peter J. Diamond

New York University (NYU) - School of Continuing and Professional Studies (SCPS) ( email )

New York, NY
United States

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