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CEP discussion paper
Do Matching Frictions Explain Unemployment? Not in Bad Times
Pascal Michaillat
November 2010
Paper No' CEPDP1024:
Full Paper (pdf)

JEL Classification: E24; E32; J64

Tags: unemployment; matching frictions; job rationing

This paper models unemployment as the result of matching frictions and job rationing. Job rationing is a shortage of jobs arising naturally in an economic equilibrium from the combination of some wage rigidity and diminishing marginal returns to labor. During recessions, job rationing is acute, driving the rise in unemployment, whereas matching frictions contribute little to unemployment. Intuitively, in recessions jobs are lacking, the labor market is slack, recruiting is easy and inexpensive, so matching frictions do not matter much. In a calibrated model, cyclical fluctuations in the composition of unemployment are quantitatively large.