Abstract
AbstractI specify a simple search and matching model of the labour market and estimate it on unemployment and vacancy data for Hong Kong over the period 2000–2010 using Bayesian methods. The model fits the data remarkably well. The estimation shows that productivity shocks are the main driver of fluctuations in the labour market, with cyclical movements in the separation rate playing only a subordinate role. The parameter estimates are broadly consistent with those found in the literature. To replicate the volatility of unemployment and vacancies, the model estimates require a high replacement ratio and a low bargaining power for workers, in addition to two extraneous sources of uncertainty. The estimates are robust to a relaxation of the prior information and small changes in the underlying model specification, which suggests that the data are informative and that the model is well specified. Overall, the Hong Kong labour market can be characterized by having a low degree of churning in normal times, but rapid firings and hirings in recessions and expansions.
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