Recent research has reaffirmed that the prob? ability of an unemployed worker finding a job varies substantially over the business cycle. Robert E. Hall (2005, 101) concludes from his examination of a variety of data sources that Unemployment is high in a recession because jobs are hard to find, not because more job-seek? ers have been dumped into the labor market by elevated separation rates. Shimer (2007) shows that movements in the job finding probability account for three-quarters of the fluctuations in the unemployment rate in the United States during the postwar period, while movements in the exit rate from employment to unemployment account for the other quarter. Michael W. Elsby, Ryan Michaels, and Gary Solon (2007) argue that movements in the job finding probability accounted for about 65 percent of unemploy? ment fluctuations prior to the last two reces? sions, and more in 1990-1991 and 2001. Shigeru Fujita and Gary Ramey (2007) claim a more substantial role for the exit rate to unemploy? ment but still find that the job finding probabil? ity accounts for at least half of the fluctuations in unemployment. While it is theoretically convenient to discuss a single job finding probability for all workers, economists have long recognized that the job finding probability falls with unemployment duration (Hyman B. Kaitz 1970). This paper reexamines duration dependence and the cycli? cally of duration dependence in the job finding probability, both empirically and theoretically. To start, I develop a simple model with a single parameter that determines both how the job finding probability varies with unemployment duration and how it varies with aggregate eco? nomic conditions. The model's main departure from most existing research is to think of unemployed workers as waiting for labor mar? ket conditions to improve, rather than searching for job opportunities (Boyan Jovanovic 1987; Fernando Alvarez and Shimer 2007). They continuously compare their lifetime utility in the best available job with their lifetime utility if they remain unemployed. Individual / works if this difference, 8?(t), is positive at time t and not if it is negative. If S? is persistent, this leads to duration dependence in the hazard rate of exiting unemployment, since a newly unem? ployed worker is more likely to be near the threshold for taking a job than someone who is long term unemployed. The extent of dura? tion dependence is governed by the stochastic process for S?, which also determines how the average job finding probability varies with eco? nomic conditions.

This paper develops a dynamic model of mismatch. Workers and jobs are randomly allocated to labor markets. Each market clears, but some have excess (unemployed) workers and some have excess (vacant) jobs. As workers and jobs switch markets, unemployed workers find vacancies and employed workers become unemployed. The model is quantitatively consistent with the business cycle frequency comovement of unemployment, vacancies, and the job finding rate and explains much of these variables' volatility. It can also address cyclicality in the separation rate into unemployment and duration dependence in the job finding rate. The results are robust to some nonrandom mobility. (JEL E24, J41, J63, J64)

This paper argues that the textbook search and matching model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies in response to shocks of a plausible magnitude. In the United States, the standard deviation of the vacancy-unemployment ratio is almost 20 times as large as the standard deviation of average labor productivity, while the search model predicts that the two variables should have nearly the same volatility. A shock that changes average labor productivity primarily alters the present value of wages, generating only a small movement along a downward-sloping Beveridge curve (unemploymentvacancy locus). A shock to the separation rate generates a counterfactually positive correlation between unemployment and vacancies. In both cases, the model exhibits virtually no propagation.

This paper studies the assignment of heterogeneous workers to heterogeneous jobs. Owing to the anonymity of a large labor market, workers use mixed strategies when applying for jobs. This randomness generates coordination frictions. Two workers may apply for a particular job, whereas an identical job gets no applications. The model generates assortative matching, with a positive but imperfect correlation between matched workers’ and firms’ types. It predicts that a worker’s wage is increasing in her job’s productivity and a firm’s profit is increasing in its employees’ productivity. The model also yields a version of the welfare theorems.

In Becker's (1973) neoclassical marriage market model, matching is positively assortative if types are complements: i.e., match output f(x, y) is suipermoddlar in x and y. We reprise this famous result assuming time-intensive partner search and transferable output. We prove existence of a search equilibrium with a continuum of types, and then characterize matching. After showing that Becker's conditions on match output no longer suffice for assortative matching, we find sufficient conditions valid for any search frictions and type distribution: supermodularity not only of output f, but also of log f, and log f Symmetric submodularity conditions imply negatively assortative matching. Examples show these conditions are necessary.

We develop a dynamic equilibrium model of asset markets with adverse selection. There exists a unique equilibrium in which better quality assets trade at higher prices but with a lower price-dividend ratio in less liquid markets. Sellers of high-quality assets signal quality by accepting a lower trading probability. We show how the distribution of sellers' private information affects an asset's price and liquidity, how a change in that distribution can cause a fire sale and a flight to quality, and how asset purchase and subsidy programs may raise prices and liquidity and reverse the flight to quality. (JEL D82, G12)

This paper argues that a risk-averse worker’s after-tax reservation wage encodes all the relevant information about her welfare. This insight leads to a novel test for the optimality of unemployment insurance based on the responsiveness of reservation wages to unemployment benefits. Some existing estimates imply significant gains to raising the current level of unemployment insurance but highlight the need for more research on the determinants of reservation wages. Our approach is intuitive and complements those based on Baily’s (1978) test. Some advantages of our test are that it uses less of the structure of the model, it is entirely behavioral and does not require separate risk-aversion estimates, and it is robust to various extensions including worker heterogeneity. Shimer’s research is supported by a grant from the National Science Foundation. Werning is grateful for the hospitality of the Federal Reserve Bank of Minneapolis and Harvard University. We are grateful to The goal of this paper is to develop a test for the optimal level of unemployment insurance

Abstract We develop an economic model of transitions in and out of employment. Heterogeneous workers switch employment status when the net benefit from working, a Brownian motion with drift, hits optimally chosen barriers. This implies that the duration of jobless spells for each worker has an inverse Gaussian distribution. We allow for arbitrary heterogeneity across workers and prove that the distribution of inverse Gaussian distributions is partially identified from the duration of two non-employment spells for each worker. We estimate the model using Austrian social security data and find that dynamic selection is a critical source of duration dependence.

We extend the concept of competitive search equilibrium to environments with private information, and in particular adverse selection.Principals (e.g.employers or agents who want to buy assets) post contracts, which we model as revelation mechanisms.Agents (e.g.workers, or asset holders) have private information about the potential gains from trade.Agents observe the posted contracts and decide where to apply, trading off the contracts' terms of trade against the probability of matching, which depends in general on the principals' capacity constraints and market search frictions.We characterize equilibrium as the solution to a constrained optimization problem, and prove that principals offer separating contracts to attract different types of agents.We then present a series of applications, including models of signaling, insurance, and lemons.These illustrate the usefulness and generality of the approach, and serve to contrast our findings with standard results in both the contract and search literatures.