Abstract
This paper contributes to the debate concerning micro-foundations of matching functions in frictional labor markets. The focus is on a particular matching regime, i.e., the so-called urn-ball process. It is shown that in a twosector economy, even in the presence of heterogeneous workers, the assumption of applicants-ranking may be misleading. Instead, the choice concerning the adoption of either ranking or no-ranking behavior is endogenous and it is affected by both the tightness of the two sectors and the composition of the labor force in terms of skills. Moreover it is proved that exogenous shocks may change the form of the matching function. This result casts additional doubts on the assumption of exogenous matching function often made in empirical works aimed at assessing the effectiveness of policy measures.
Highlights
Matching functions represent an important tool that allows labor economists to model employment out-flows and in-flows in the presence of frictional labor markets
This result casts additional doubts on the assumption of exogenous matching function often made in empirical works aimed at assessing the effectiveness of policy measures
The focus is on a particular matching regime known as urn-ball process analyzed by [8] and [9] among the first and it considers the case of applicant-ranking focusing on the rationale of its microfunadation
Summary
Matching functions represent an important tool that allows labor economists to model employment out-flows and in-flows in the presence of frictional labor markets (see [1] [2] [3]). The ranking decision is left to be determined by agents’ optimal actions Using this framework, it is shown that, in the presence of heterogeneous workers, the assumption of ranking may seem obvious, there can be standard economic environments where the specific form of the hiring process results from a more complex strategic behavior. It is shown that, in the presence of heterogeneous workers, the assumption of ranking may seem obvious, there can be standard economic environments where the specific form of the hiring process results from a more complex strategic behavior The rationale behind this result turns out to be straightforward when the issue of sector tightness in terms of labor supply and demand is taken into account along with the composition of the labor force in terms of productivity. This means that the empirical assessment of the effect of labor policy on job matches turns out to be a difficult task requiring appropriate econometric
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