Beveridge curve under endogenous separation model: The role of wage rigidity and match-specific productivity

Abstract

A standard endogenous separation model developed by Mortensen and Pissarides (1994) has a drawback in replicating the negative correlation between unemployment and vacancy rates. To address this issue, I extended the model by incorporating wage rigidity and modifying the assumption about idiosyncratic match-specific productivity. Results indicate that introducing wage rigidity can produce the Beveridge curve, while the degree of negative correlation is slightly lower than that presented in the data. Modifying the model to randomly draw match-specific productivity for new matches also increases the degree of negative correlation between unemployment and vacancy rates. These results suggest that an endogenous separation model can explain the observed variation by adding frictions.