Understanding European unemployment with matching and search-island models

Lars Ljungqvist, Thomas Sargent

    Research output: Contribution to journalArticle

    Abstract

    To understand European and American unemployment during the last 60 years, we use a search-island model and four matching models with workers who have heterogeneous skills and entitlements to government benefits. When there is higher turbulence, in the sense of worse skill transition probabilities for workers who suffer involuntary layoffs, high government mandated unemployment insurance (UI) and employment protection (EP) in Europe increase unemployment rates and durations. But when there is lower turbulence, high European EP suppresses unemployment rates despite high European UI. Four matching models differ in how they assign unemployed workers to matching functions. That affects how strongly unemployment responds to increases in turbulence. Heterogeneity among unemployed workers highlights the central role of adverse labor market externalities in matching models and reveals that the cost of posting vacancies is the lynchpin of a matching model.

    Original languageEnglish (US)
    Pages (from-to)2139-2179
    Number of pages41
    JournalJournal of Monetary Economics
    Volume54
    Issue number8
    DOIs
    StatePublished - Nov 2007

    Fingerprint

    Workers
    Search and matching
    Matching model
    European unemployment
    Turbulence
    Government
    Employment protection
    Unemployment insurance
    Unemployment
    Unemployment rate
    Unemployment duration
    Costs
    Transition probability
    Labour market
    Matching function
    Externalities
    Entitlement
    Layoffs
    Vacancy

    Keywords

    • Employment protection
    • Matching
    • Search
    • Turbulence
    • Unemployment insurance

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Finance

    Cite this

    Understanding European unemployment with matching and search-island models. / Ljungqvist, Lars; Sargent, Thomas.

    In: Journal of Monetary Economics, Vol. 54, No. 8, 11.2007, p. 2139-2179.

    Research output: Contribution to journalArticle

    Ljungqvist, Lars ; Sargent, Thomas. / Understanding European unemployment with matching and search-island models. In: Journal of Monetary Economics. 2007 ; Vol. 54, No. 8. pp. 2139-2179.
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