Matching Efficiency and Labour Market Heterogeneity in the United Kingdom

Abstract

This paper investigates how compositional changes in the UK labour market affect the matching process between vacancies and job seekers. We augment a state space representation of the aggregate matching function with a measure of job seekers’ ‘search intensity’ that is recovered from micro-data on individual unemployment-to-employment transitions, in line with recent developments in the literature. The baseline results show that matching efficiency declined by around 15% between 1995 and 2010 but subsequently recovered by about 5 percentage points in the last six years. Compositional changes in the labour force that improved aggregate search intensity prior to the 2008 recession will tend to obscure the decline in aggregate matching efficiency unless controlled for properly. Considering broader definitions of job seekers that include marginally-attached workers and on-the-job searchers exacerbates the registered decline in matching efficiency. Changes in ‘recruiting intensity’ and the share of vacancies posted by different industries provide a potential explanation for some, but not all, of the initial fall in matching efficiency that preceded the 2007–08 recession. Finally, we quantitatively analyse how labour force heterogeneity and changes in matching efficiency have affected the shape and location of the UK Beveridge Curve.