Skip to main content


  • Kenneth Beauchemin (a1) and Murat Tasci (a2)

We construct a multiple-shock, discrete-time version of the Mortensen–Pissarides labor market search model to investigate the basic model's well-known tendency to underpredict the volatility of key labor market variables. In addition to the standard labor productivity shock, we introduce shocks to matching efficiency and job separation. We estimate the multiple-shock model and then simulate its properties. Although it generates significantly more volatility while preserving the Beveridge curve relationship, the multiple-shock model generates counterfactual implications for the cyclicality of job separations. Using a business cycle accounting approach, next we show that the model requires significantly procyclical and volatile matching efficiency and counterfactually procyclical job separations to render the observed data without error. We conjecture that the basic Mortensen–Pissarides model lacks mechanisms to generate sufficiently strong labor market reallocation over the business cycle, and suggest nontrivial labor force participation and job-to-job transitions as promising avenues of research.

Corresponding author
Address correspondence to: Murat Tasci, Research Department, P.O. Box 6387, Federal Reserve Bank of Cleveland, Cleveland, OH 44101-1387, USA; e-mail:
Hide All
Andolfatto David (1996) Business cycles and labor market search. American Economic Review 86 (1), 112132.
Barnichon Regis (2010) Building a composite help-wanted index. Economics Letters 109, 175178.
Barnichon Regis and Figura Andrew (2011a) Labor Market Heterogeneities, Matching Efficiency, and the Cyclical Behavior of the Job Finding Rate. Mimeo, Board of Governors of the Federal Reserve System.
Barnichon Regis and Figura Andrew (2011b) What Drives Movements in the Unemployment Rate? A Decomposition of the Beveridge Curve. Board of Governors of the Federal Reserve System Finance and Economics Discussion Series 2010-48.
Beauchemin Kenneth and Tasci Murat (2011) Diagnosing Labor Market Search Models: A Multiple-Shock Approach. Mimeo, Federal Reserve Bank of Cleveland.
Blanchard Olivier Jean and Diamond Peter (1990) The cyclical behavior of the gross flows of U.S. workers. Brookings Papers on Economic Activity 1990 (2), 85143.
Chari V.V., Kehoe Patrick, and McGratten Ellen R. (2007) Business cycle accounting. Econometrica 75 (3), 781836.
Cheremukhin Anton A. and Restrepo-Echavarria Paulina (2010) The Labor Wedge as a Matching Friction. Working paper #1004, Federal Reserve Bank of Dallas.
Christiano Lawrence (2002) Solving dynamic equilibrium models by a method of undertermined coefficients. Computational Economics 20 (1–2), 2155.
Cole Harold L. and Rogerson Richard (1999) Can the Mortensen–Pissarides matching model match the business cycle facts? International Economic Review 40 (4), 933959.
Costain J.S. and Reiter M. (2008) Business cycles, unemployment insurance and the calibration of the matching models. Journal of Economic Dynamics and Control 32 (4), 11201155.
Darby Michael R., Haltiwanger John C., and Plant Mark W. (1986) The Ins and Outs of Unemployment: The Ins Win. Working paper 1997, National Bureau of Economic Research.
Davis Steven and Haltiwanger John (1992) Gross job creation, gross job destruction, and employment reallocation. Quarterly Journal of Economics 107 (3), 819863.
Davis Steven, Haltiwanger John, and Schuh Scott (1996) Job Creation and Destruction. Cambridge, MA: MIT Press.
Den Haan W., Ramey Garey, and Watson Joel (2000) Job destruction and propagation of shocks. American Economic Review 90 (3), 482498.
Elsby Michael, Michaels Ryan, and Solon Gary (2009) The ins and outs of cyclical unemployment. American Economic Journal: Macroeconomics 1 (1), 84110.
Fallick B. and Fleischman C.A. (2004) Employer-to-Employer Flows in the U.S. Labor Market: The Complete Picture of Gross Worker Flows. Board of Governors of the Federal Reserve System Finance and Economics Discussion Series 2004-34.
Fujita Shigeru and Ramey Gary (2009) The cyclicality of separation and job finding rates. International Economic Review 50 (2), 415430.
Hagedorn M. and Manovskii I. (2007) The cyclical behavior of equilibrium unemployment and vacancies revisited. American Economic Review 98 (5), 16921706.
Hall Robert E. (2004) The Amplification of Unemployment Fluctuations through Self-Selection. NBER working paper 11186.
Hall Robert E. (2005) Employment fluctuations with equilibrium wage stickiness. American Economic Review 95 (1), 5065.
Hornstein A., Krusell Per, and Violante G.L. (2006) Frictional wage dispersion in search models: A quantitative assessment. Federal Reserve Bank of Richmond working paper 06-07.
Hosios Arthur (1990) On the efficiency of matching and related models of search and unemployment. Review of Economic Studies 57 (2), 279298.
Ingram B.F., Kocherlakota Narayana, and Savin N. Eugene (1994) Explaining business cycles: A multiple-shock approach. Journal of Monetary Economics 34 (3), 415428.
Kennan John (2010) Private information, wage bargaining and employment fluctuations. Review of Economic Studies 77 (2), 633664.
Krause M.U. and Lubik T.A. (2006) The cyclical upgrading of labor and on-the-job search. Labour Economics 13 (4), 459477.
Merz Monika (1995) Search in the labor market and the real business cycle. Journal of Monetary Economics 36 (2), 269300.
Merz Monika (1999) Heterogeneous job-matches and the cyclical behavior of labor turnover. Journal of Monetary Economics 43 (1), 91124.
Mortensen Dale and Nagypal Eva (2007) More on unemployment and vacancy fluctuations. Review of Economic Dynamics 10 (3), 327347.
Mortensen Dale and Pissarides Christopher A. (1994) Job creation and job destruction in the theory of unemployment. Review of Economic Studies 61 (3), 397415.
Nagypal Eva (2004) Worker Reallocation over the Business Cycle: The Importance of Job-to-Job Transitions. Northwestern University working paper.
Nagypal Eva (2006) Amplification of productivity shocks: Why don't vacancies like to hire the unemployed? In Bunzel al. (eds.), Structural Models of Wage and Employment Dynamics, pp. 481506. Amsterdam: Elsevier.
Pescatori Andrea and Tasci Murat (2011) Search Frictions and the Labor Wedge. Federal Reserve Bank of Cleveland working paper 11-11.
Petrongolo Barbara and Pissarides Christopher A. (2001) Looking into the black box: A survey of the matching function. Journal of Economic Literature 39 (2), 390431.
Pissarides Christopher A (2000) Equilibrium Unemployment Theory. Cambridge, MA: MIT Press.
Pissarides Christopher A (2009) The unemployment volatility puzzle: Is wage stickiness the answer? Econometrica 77 (5), 1339–69.
Ramey Garey (2008) Exogenous vs. Endogenous Separation. UCSD working paper.
Sahin Aysegul, Song J., Topa G., and Violante G.L. (2011) Measuring Mismatch in the U.S. Labor Market. Mimeo, Federal Reserve Bank of New York.
Shimer Robert (2004) The consequences of rigid wages in search models. Journal of the European Economic Association (Papers and Proceedings) 2 469479.
Shimer Robert (2005a) The cyclical behavior of unemployment and vacancies: Evidence and theory. American Economic Review 95 (1), 2549.
Shimer Robert (2005b) The cyclicality of hires, separations, and job-to-job transitions. Federal Reserve Bank of St. Louis Review 87 (4), 493-507.
Silva J.I. and Toledo M. (2009) Labor turnover costs and the cyclical behavior of vacancies and unemployment. Macroeconomic Dynamics 13 (1), 7696.
Stock James H. and Watson Mark W. (2010) Monthly Estimates of GDP and GDI. Research Memorandum, Princeton University, September.
Tasci Murat (2007) On-the-Job Search and Labor Market Reallocation. Federal Reserve Bank of Cleveland working paper 0725.
Tasci Murat (2011) The Ins and Outs of Unemployment in the Long Run: A New Estimate for the Natural Rate? Federal Reserve Bank of Cleveland working paper 10-17R.
Veracierto Marcelo (2011) Worker flows and matching efficiency. Economic Perspectives, Federal Reserve Bank of Chicago, 35, 147169.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *



Full text views

Total number of HTML views: 0
Total number of PDF views: 117 *
Loading metrics...

Abstract views

Total abstract views: 207 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 18th January 2018. This data will be updated every 24 hours.