Matching Theory - Nobel Prize Winning Model

8/8/2019 Matching Theory - Nobel Prize Winning Model

1/25

MatchingTheory

Nobel Prize WinningModel - 2010

Prof. D. Joseph Anbarasu,Bishop Heber College, Tiruchirappalli, India

11/16/2010 Dr. D. Joseph Anbarasu 1


2/25

Why Does Unemployment Remains High In Developed

Countries?

Contributors

Peter Diamond, Dale

Mortensen and

Christopher Pissarides.

Justin Lahart and David.

Jonathan Cheng.



3/25


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


4/25

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



5/25

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.



6/25

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



7/25

World Unemployment Rate



8/25

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.



9/25

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.



10/25

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



11/25

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.



12/25

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.



13/25

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.



14/25

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.



15/25

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.



16/25

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



17/25

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.



18/25

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.



19/25

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:


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)


20/25

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



21/25

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.



22/25

Matching function


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).


23/25

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



24/25

THANK YOU



25/25

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.


Date post:	10-Apr-2018
Category:	Documents
Upload:	joseph-anbarasu
View:	219 times
Download:	0 times

Matching Theory - Nobel Prize Winning Model

Documents