The standard search and matching model (D. Mortensen and C.Pissarides,1994; Pissarides, 2000) has been recently challanged by many economists. The Mortensen-Pissarides (1994) model in general says that it takes time to match jobs and workers, which causes unemployment as an outcome of market frictions. The volatility of unemployment fluctuations in the model is not corresponding to the baseline calibration that R. Shimer (2005) has found for the US data. Many authors modified the model in order to solve this lack of volatility.
First I introduce the Mortensen-Pissarides model to refer in the second part to the models parameters. Next, I present solutions found by Hall (2005) who solves the model via rigid wage setting and Hagedorn and Manovskii(2005) who provide a small surplus calibration to overcome the lack in volatility of the labor market variables. According to the so called “Shimer Puzzle” I will present shortly the findings of Gartner, Merkl and Rothe (2009), who calibrate the key labor market variables over the business cycle for the West-German labor market. Further I introduce Morensen and Nagypál (2007) publications on an amneded version of the model and a model with endogenous separations.
Table of Contents
1 Introduction
1.1 Literature
2 The Model
3 The Shimer Results and Solving the Lack of Volatility
3.1 Accounting for labor market volatility in Germany: Gartner et al. (2009)
4 Extensions of the MP Model
4.1 Endogenous Separations according to Mortensen and Nagypál (2007)
5 Conclusion
5.1 Concluding Remarks
6 References
Objectives and Topics
The primary objective of this seminar paper is to examine the "Shimer Puzzle," which refers to the inability of the standard Mortensen-Pissarides (MP) search and matching model to replicate the empirical volatility of labor market variables observed in the data. The research investigates various proposed solutions and model extensions, specifically focusing on wage rigidity, small surplus calibrations, and endogenous job separation mechanisms.
- Theoretical foundations of the standard Mortensen-Pissarides matching model.
- Critical analysis of the Shimer Puzzle regarding labor market fluctuations.
- Evaluation of Hall's rigid wage concept and Hagedorn and Manovskii’s calibration strategy.
- Examination of endogenous job separation as a mechanism to enhance model volatility.
- Comparison of US labor market data with German labor market findings.
Excerpt from the Book
1 Introduction
The standard search and matching model (D. Mortensen and C. Pissarides, 1994; Pissarides, 2000) has been recently challanged by many economists. The Mortensen-Pissarides (1994) model in generally says that it takes time to match jobs and workers, which causes unemployment as an outcome of market frictions. The volatility of unemployment fluctuations in the model is not corresponding to the baseline calibration that R. Shimer (2005) has found for the US data. Many authors modified the model in order to solve this lack of volatility. First I introduce the Mortensen-Pissarides model to refer in the second part to the models parameters. Next, I present solutions found by Hall (2005) who solves the model via rigid wage setting and Hagedorn and Manovskii (2005) who provide a small surplus calibration to overcome the lack in volatility of the labor market variables. According to the so called “Shimer Puzzle” I will present shortly the findings of Gartner, Merkl and Rothe (2009), who calibrate the key labor market variables over the business cycle for the West-German labor market. Further I introduce Morensen and Nagypál (2007) publications on an amneded version of the model and a model with endogenous separations.
Summary of Chapters
1 Introduction: This chapter introduces the standard search and matching model and outlines the discrepancy between theoretical model predictions and empirical labor market volatility, commonly known as the "Shimer Puzzle".
1.1 Literature: This section reviews key academic contributions addressing the lack of volatility, including the work of Shimer, Hall, Hagedorn, Manovskii, and Mortensen and Nagypál.
2 The Model: This chapter provides a detailed description of the standard MP search and matching framework, including matching technology, Bellman equations, and the Nash bargaining solution.
3 The Shimer Results and Solving the Lack of Volatility: This chapter analyzes Shimer's empirical challenge to the model and evaluates proposed solutions such as wage rigidity and small worker surplus calibrations.
3.1 Accounting for labor market volatility in Germany: Gartner et al. (2009): This section discusses the application of the standard MP model to German data, noting that the observed volatilities are even higher than those in the US.
4 Extensions of the MP Model: This chapter explores model modifications, focusing on how endogenous separation rates affect labor market dynamics.
4.1 Endogenous Separations according to Mortensen and Nagypál (2007): This section examines the impact of allowing for endogenous separation rates to account for job destruction and its effect on market tightness.
5 Conclusion: The conclusion summarizes the findings, highlighting that while various extensions improve model performance, no single modification fully explains the empirical data.
5.1 Concluding Remarks: This section synthesizes the limitations of current model extensions and suggests future research directions regarding wage setting and heterogeneity.
6 References: This chapter lists the academic literature and sources cited throughout the paper.
Keywords
Search and Matching Model, Shimer Puzzle, Labor Market Volatility, Unemployment, Vacancies, Wage Rigidity, Endogenous Separation, Nash Bargaining, Market Tightness, Job-finding Rate, Productivity Shocks, Calibration, Business Cycle, Mortensen-Pissarides Model.
Frequently Asked Questions
What is the core problem addressed in this work?
The work addresses the "Shimer Puzzle," which is the finding that the standard Mortensen-Pissarides model cannot explain the high volatility of labor market variables, such as unemployment and vacancies, in response to productivity shocks.
Which central topics are discussed in the paper?
The paper covers the mechanics of the standard MP model, the critique of its calibration by Robert Shimer, and various theoretical attempts to resolve the puzzle, including wage stickiness, surplus calibration, and endogenous job separation.
What is the primary objective of this research?
The primary objective is to review and analyze how economists have modified the standard search and matching model to better match empirical findings observed in labor market data.
Which scientific methodology is used?
The paper employs a comparative literature review of macroeconomic models, analyzing the mathematical foundations (Bellman equations) and the elasticity of market tightness in different model specifications.
What does the main body cover?
The main body covers the theoretical setup of the MP model, evaluates specific solutions like Hall's rigid wage and Hagedorn & Manovskii's calibration, and discusses extensions like endogenous separations as proposed by Mortensen and Nagypál.
Which keywords characterize the work?
Central keywords include Search and Matching Model, Shimer Puzzle, Labor Market Volatility, Wage Rigidity, and Endogenous Separation.
Why is the German labor market relevant to this study?
The paper notes that research by Gartner et al. (2009) indicates that the labor market volatility in Germany is even higher than in the US, providing a more challenging environment for the standard MP model.
What is the conclusion regarding wage rigidity?
The paper concludes that while wage rigidity, as suggested by Hall (2005), helps the model match empirical data, critics like Haefke (2008) argue that this stickiness primarily applies to long-term jobs, whereas new hires face more flexible wages.
- Citar trabajo
- Kathrin Tiecke (Autor), 2009, How to solve the Lack of Volatility in the standard MP model, Múnich, GRIN Verlag, https://www.grin.com/document/162486
