Frictional and Non‐Frictional Unemployment in a Labor Market with Matching Frictions

Abstract

Using the Mortensen and Pissarides model of a labor market with frictions, this paper proposes a new method, simpler than the one presented in Michaillat (), for decomposing unemployment into frictional and non‐frictional (rationing) unemployment for a derived rigid wage‐setting rule. We use it to compute the frictional and non frictional unemployment rate for two economies characterized by different labor market institutions, namely the US and the Spanish economy. For the entire period under study, the US frictional unemployment rate is around 36 per cent of total unemployment, whereas for Spain, approximately 20 per cent of all unemployment is due to frictions. This outcome may be explained by the fact that Spain is a country with more labor market rigidities than the US. The empirical results obtained with our method are also consistent with the main result of Michaillat (): in both countries, non‐frictional unemployment increases in recessions.