Comment

Abstract

Within the flow approach, the search and matching (S&M) model has emerged as the canonical theoretical framework for the analysis of aggregate labor markets. This is a rich incomplete-market framework, which can accommodate in a tractable manner a wide variety of preferences, wage-setting protocols, idiosyncratic and aggregate shocks of various kinds affecting workers and firms, savings, and various forms of self- or implicit insurance against those shocks. The model is flexible enough to dovetail nicely with DSGE models of all flavors, from Neoclassical to New Keynesian. From an empirical viewpoint, the S&M model is firmly grounded in the vast body of micro-level observations on labor market transitions. Indeed, the two sides of this literature, empirical and theoretical, have developed together, and even changed the way labor market statistics are collated. For example, in 2000, the Bureau of Labor Statistics started the Job Openings and Labor Turnover Survey (JOLTS), which is expressly designed to provide timely and high-frequency empirical information about such concepts as vacancies, hires, and quits, that are central to the S&M model. JOLTS allows, in particular, to directly measure job market tightness, the vacancy/unemployment rate, which plays the same role in the S&M flow model as the labor demand/supply gap in the traditional spot market stock framework.