UvA

The assumption of a constant matching function, typically made in the literature, implies that a given number of searching workers and employers always leads to the same number of matches. This is unlikely to be true, for example, if the composition of searching workers changes over the cycle. This paper relaxes the assumption of constant matching function parameters and allows match efficiency to uctuate. Using data on the job finding rate and unemployment, an unobserved components model is estimated where both match efficiency and vacancies are unobserved. The latter deals with the poor data availability of vacancies over most of the sample. Estimated match efficiency is procyclical and can explain about 25% of job finding rate uctuations. Drops in match efficiency account for up to 20% of unemployment rate increases during the most severe recessions. Next, the paper shows that procyclical movements in measured match efficiency are present even in a simple matching model
with endogenous separations due to a countercyclical rejection rate. A simple extension of introducing firing costs results in the model performing well quantitatively.