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MatchingTheory
Nobel Prize WinningModel - 2010
Prof. D. Joseph Anbarasu,Bishop Heber College, Tiruchirappalli, India
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Why Does Unemployment Remains High In Developed
Countries?
Contributors
Peter Diamond, Dale
Mortensen and
Christopher Pissarides.
Justin Lahart and David.
Jonathan Cheng.
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Dr. Peter A. Diamond, one of the world's leading economists, is
an Institute Professor at the Massachusetts Institute of
Technology.
He modeled how frictionworks
Dale T. Mortensenis the Ida C. Cook Professor of Economics at
Northwestern University and the Niels Bohr Visiting Professor
of Economics at Aarhus University, a research associate of theNational Bureau of Economic Research (NBER), and a research
fellow of the Institute for the Study of Labor (IZA). He and Mr.
Pissarides, 62,appliedthe ideatothe labourmarket
Prof. Christopher Pissarides,
from London School of Economics
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Search Theory
Difficulties buyersandsellers often face infinding each other in themarketplace
In the job market, wherethe buyers and sellers areemployersandworkers
Applied to a host of other
topics, from the housingmarket to the search fora spouse
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Friction
High unemployment can
be the result of "friction,.
It keeps employers and
workers apart. Friction results
Regulatory rules on firing,
or
The lack of appropriateskills among the
unemployed, among other
things.
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Unemployment Insurance
More generous benefitsgive rise to higherunemployment,
because workers spendmore time looking.
It is a benefit to theeconomy
It leads to workerslanding jobs that betteruse their capabilities
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World Unemployment Rate
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Overview of Employment Theories
People are without jobs andthey have actively lookedfor work within the pastfourweeks.
The unemployment rate is ameasure of the prevalenceof unemployment
It is calculated as apercentage by dividing thenumberofunemployed
individualsbyall
individualscurrentlyinthe
labour force.
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Classical Unemployment
Classical unemploymentis also known as the realwage unemployment ordisequilibrium
unemployment. This type of
unemployment occurswhen trade unions andlabor organization bargain
for higher wages, whichleads to fall in thedemand for labor.
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Cyclical Unemployment
There is a recession.
There is a downturn in aneconomy
The aggregate demand for
goods and servicesdecreases
Demand for labourdecreases.
At the time of recession,
unskilled and surplus laborsbecome unemployed.
It is called Keynesianunemployment
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Marxist unemployment
According to Karl Marx,
Unemployment is inherent withinthe unstable capitalist system
Periodic crises of mass expected.
The function of the proletariat
within the capitalist system is toprovide a "reserve army oflabour"that creates downwardpressure onwages.
This is accomplished by dividingthe proletariat into surplus labour
(employees) and under-employment (unemployed).
This reserve army of labour fightamong themselves for scarce jobsat lowerand lowerwages.
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Involuntary Unemployment
Voluntarily employed arewilling and able to work atany given wage.
Some people may be
unemployed simply becausethey are looking for a betterjob
These people are voluntarilyunemployed.
Involuntary unemploymentdoes not exist in agrariansocieties nor is it formallyrecognized to exist inunderdeveloped.
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Full Employment
Full employment is a condition of thenational economy
All persons willing and able to workat the prevailing wages and workingconditions are able to do so.
It is defined either as 0%
unemployment, literally, nounemployment , as by James Tobin,or
As the level of employment rateswhen there is no cyclicalunemployment.
It is defined by the majority of
mainstream economists as being anacceptable level of naturalunemployment above 0%, thediscrepancy from 0% being due tonon-cyclical types of unemployment.
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Full Employment
The specific level of unemploymentthat exists in an economy that doesnot cause inflation to increase.
The non-accelerating rate ofunemployment (NAIRU) often
represents an equilibrium betweenthe state of the economy and thelabour market.
NAIRU is also sometimes referredas a "long-run Phillips curve". For example, suppose that the
unemployment rate is at 5% and the
inflation rate is 2%. Assuming that both of these values
remain the same for a period ofyears, it can be said that whenunemployment is under 5%, it isnatural for an inflation rate of 2% tocorrespond with it.
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Structural unemployment
It occurs due to the structuralchanges within an economy.
This occurs when there is a mismatchof skilled workers in the labourmarket.
Some of the causes of the structural
unemployment are geographical immobility (difficulty in
moving to a new work location),
occupational immobility (difficulty inlearning a new skill) and
technological change (introduction ofnew techniques and technologies thatneed less labour force).
Structural unemployment dependson the growth rate of an economyand also on the structure of anindustry.
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Frictional unemployment
Frictional unemployment is atemporarycondition.
It occurs when an individual is outof his current job and looking foranother job.
The time periodof shiftingbetween two jobs is known asfrictional unemployment.
The probability of getting a job ishigh in a developed economy
This lowers the probability offrictional unemployment.
There are employment insuranceprograms to tide over frictionalunemployment
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Beveridge curve
The frictions in the labourmarket are sometimesillustrated graphicallywith a Beveridge curve, a
downward-sloping,convex curve.
It shows a correlationbetween the
unemployment rate onone axis and the vacancyrate on the other.
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The Beveridge Curve can move for the
following reasons
1. The matching process will determine how efficiently workers find newjobs.
2. Labour force participation rate; as the number looking for jobs increasesrelative to total population, the unemployment rate increases, shiftingthe curve outwards from the origin.
3. Long-term unemploymentwill push the curve outward from the origin.This could be caused by;
deterioration of human capital or
a negative perception of the unemployed by the potential employers.
4. Frictional unemployment; a decrease in frictions would reduce thenumber of firms searching for employees and the number of unemployedsearching for jobs. This would shift the curve towards the origin.
Frictional unemployment is due to job losses,
resignations and
job creation.
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Matching theory(macroeconomics)- Matching function
A matching function is amathematicalrelationship thatdescribes the formation of
new relationships fromunmatched agents of theappropriate types.
For example, in the contextof job formation, matching
functions are sometimesassumed to have the
following 'Cobb-Douglas'form:
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Qa, & b Positive constants. In this equation,
ut
the number of unemployed job seekers
in the economy at a given time ,
vt
Number of vacant jobs firms trying to
fill.
mt
The number of new relationships
(matches) created (per unit of time)
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Matching function
A matching function is in generalanalogous to a production
function.
A production function usuallyrepresents the production of
goods and services from inputslike labour and capital,
A matching function representsthe formation of newrelationships from the pools ofavailable unmatched individuals.
Estimates of the labor market
matching function suggest that ithas constant returns to scale =
a+b1
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Matching function
If the fraction of jobs thatseparate (due to firing, quits,and so forth) from one period
to the next is H, then tocalculate the change inemployment from one periodto the next we must add the
formation of new matches andsubtract off the separation ofold matches.
A period may be treated as aweek, a month, a quarter, orsome other convenient periodof time, depending on the dataunder consideration.
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Matching function
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Suppose we write the number of
workers employed in period as
nt= Lt - ut
where Ltis the labor force in period
t. Then given the matching function
described above the dynamics of
employment over time would be
given by
For simplicity, many studies treatHas a fixed constant. But the fraction of
workers separating per period of time can be determinedendogenously if
we assume that the value of being matched varies over time for each
worker-firm pair (due, for example, to changes inproductivity).
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Applications
Matching theory has beenapplied in many economiccontexts, including: Formation of jobs, from
unemployed workers andvacancies opened by firms
Formation of marriages,from unmatchedindividuals
Allocation of loans from
banks to entrepreneurs The role of money in
facilitating sales whensellers and buyers meet
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THANK YOU
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References
References of WIKI endorsedPissarides, Christopher (2000), Equilibrium UnemploymentTheory, 2nd ed. MITPress
Economic Prize Committee of the Royal Swedish Academy of Sciences, 'ScientificBackground', page 2.
Barbara Petrongolo and ChristopherPissarides (2001), 'Looking into the black box: a
survey of the matching function'. Journal of Economic Literature 39 (2), pp. 390-431.
Dale Mortensen and ChristopherPissarides (1994), 'Job creation and job destruction inthe theory of unemployment.' Review of Economic Studies 61, pp. 397-415.
Wouter den Haan, Gray Ramey, and Joel Watson (2003), 'Liquidity flows and thefragility of business enterprises', Journal ofMonetary Economics 50 (6), pp. 1215-41.
Nobuhiro Kiyotaki and Randall Wright (1993), 'A search-theoretic approach tomonetary economics'. American Economic Review 83 (1), pp. 63-77.
Robert Shimer (2005), 'The cyclical behavior of equilibrium unemployment andvacancies'.American Economic Review 95 (1), pp. 25-49.
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