University of Konstanz Department of Economics

Summer Semester 2011

Search Theory of the Labour Market

Dr. Carlos Carrillo-Tudela
Objectives This course provides an in-depth analysis of the implications of search frictions for the labour market. In particular, we will analyse the existence of unemployment and of wage dispersion across similar workers. Several policy issues can be addressed using these models, e.g., the design of unemployment insurance systems, the impact of hiring and firing costs, etc. The course will develop the main tools of the search and matching approach. The course will include both theoretical and empirical literature, and it is intended for postgraduate students interested in research in macro labour economics. At the end of the course students should have a working knowledge of the models used and a good sense of the open questions in those subject areas for which these models are most appropriate. Requirements Students should be familiar with the basic concepts of dynamic programming and stochastic process techniques. Schedule Monday, 06/06/11, 14:00-16:00, D 201; Tuesday, 07/06/11, 14:00-16:00, D 201; Tuesday, 14/06/11, 14:00-16:00, 16:00-18:00, D 201; Monday, 20/06/11, 14:00-16:00, G 300; Tuesday, 21/06/11, 14:00-16:00, G 300; Monday, 27/06/11, 14:00-16:00, 16:00-18:00, G 201; Tuesday, 28/06/11, 14:00-16:00, 16:00-18:00, R 512. General References Pissarides C. (2000), Equilibrium Unemployment Theory, 2nd edition, MIT Press. Mortensen D. (2003), Wage Dispersion: Why are Similar People Paid Differently, 1st edition Cambridge: MIT Press. Mortensen D. and C. Pissarides (1999), New Developments in Models of Search in the Labor Market, Ch. 39, in Ashenfelter and Card, Handbook of Labor Economics, volume 3B, Elsevier. Rogerson R., R. Shimer, and R. Wright, (2005), Search-Theoretic Models of the Labor Market: A Survey, Journal of Economic Literature, December. References for Dynamic Programming and Stochastic Process Ljungqvist, L. and T. Sargent, (2004), Recursive Macroeconomics Theory, Cambridge, MIT press. Adda, G. and R. Copper, (2005), Dynamic Economics, Cambridge, MIT press. Ross, S. (2008), Introduction to Probability Models, Academic Press. 1

Outline 1. Introduction: Why are search and matching models useful to understand the labour market? 2. Job Search Theory: a. Workers search problem. Bellman equations, Poisson processes and optimal stopping rules. (McCall, 1970, Burdett, 1978) b. Duration of unemployment and employment spells. (Jolivet, Postel-Vinay and Robin, 2006) c. Optimal unemployment insurance programs. (Shimer and Werning, 2008) 3. Diamond-Mortensen-Pissarides models: a. The matching function. (Diamond, 1982, Petrongolo and Pissarides, 2005) a. Equilibrium unemployment and worker flows. (Pissarides, 1985) b. Unemployment and Real Business Cycles. (Mortensen and Pissarides, 1994, Shimer, 2005, Nagypal and Mortensen, 2007) 4. Burdett and Mortensen models: a. Diamond paradox. (Diamond, 1971, Carrillo-Tudela, Menzio, Smith, 2009) b. Wage distribution. (Albrecht and Axell, 1984, Burdett and Mortensen, 1998, Burdett, CarrilloTudela, Coles, 2009) c. Optimal contracts. (Postel-Vinay and Robin, 2002, Burdett and Coles, 2003, Carrillo-Tudela, 2009) 5. Other models of search frictions: a. Directed and Competitive search. (Moen, 1997, Burdett, Shi and Wright, 2001) b. Stock-Flow matching. (Taylor 1990, Coles and Smith, 1998, Shimer and Ebrahimy, 2008, Carrillo-Tudela and Smith, 2009) References: Albrecht J. and B. Axell, (1984), An Equilibrium Search Model of Search Unemployment. Journal of Political Economy, 92(5): 824-40. Burdett, K., (1979), A Theory of Employee Job Search and Quit Rates. American Economic Review, 68(1):212-20. Burdett, K., C. Carrillo-Tudela and M. G. Coles, (2009), Labour Market Equilibrium and Human Capital Accumulation, IZA working paper. Burdett, K. and M. G. Coles, (2003), Equilibrium Wage-Tenure Contracts. Econometrica, 71(5): 1377-1404. Burdett, K. and D. Mortensen, (1998), Wage Differentials, Employer Size, and Unemployment, International Economic Review, 39(2): 257-73. Burdett, K., S. Shi and R. Wright, (2001), Pricing and Matching with Frictions. Journal of Political Economy, 109(5): 1060-85. Carrillo-Tudela, C., (2009), An Equilibrium Search Model with Optimal Wage-experience Contracts, Review of Economic Dynamics, 12(1): 108-28.

Carrillo-Tudela, C. and E. Smith, (2009), Wage Dispersion and Wage Dynamics within and across Firms, IZA working paper. Carrillo-Tudela, C., G. Menzio and E. Smith (2009), Job Search with Bidder Recall, IZA working paper. Coles, M. G. and E. Smith, (1998), Marketplaces and Matching. International Economic Review, 39(1): 239-54. Diamond, P., (1971), A Model of Price Adjustment, Journal of Economic Theory, 3(2): 156-68. Diamond, P., (1982), Aggregate Demand Management in Search Equilibrium. Journal of Political Economy, 90(5): 881-94. Jolivet, G., F. Postel-Vinay, F. and J-M. Robin, (2006), The Empirical Content of the Job Search Model: Labor Mobility and Wage Distributions in Europe and the US, European Economic Review, 50: 877-907. McCall, J., (1970), Economics of Information and Job Search. Quarterly Journal of Economics, 84(1): 113-26. Moen, E., (1997), Competitive Search Equilibrium, Journal of Political Economy, 105(2): 385411. Mortensen, D. and C. Pissarides, (1994), Job Creation and Job Destruction in the Theory of Unemployment, Review of Economic Studies, 61(3): 397-415. Petrongolo, B. and C. Pissarides, (2001), Looking into the Black Box: A Survey of the Matching Function. Journal of Economic Literature, 39(2): 390-431. Pissarides, C., (1985), Short-Run Equilibrium Dynamics of Unemployment Vacancies and Real Wages. American Economic Review, 75(4): 676-90. Postel-Vinay F. and J-M. Robin, (2002), The Distribution of Earnings in an Equilibrium Search Model with State-Dependent Offers and Counteroffers, International Economic Review, 43(4): 989-1016. Shimer, R., (2005), The Cyclical Behavior of Equilibrium Unemployment and Vacancies. American Economic Review, 95(1): 25-49. Shimer, R. and E. Ebrahimy, (2008), Stock-Flow Matching, mimeo, Univeristy of Chicago. Shimer, R. and I. Werning, (2008), Reservation Wages and Unemployment Insurance, American Economic Review, forthcoming, Taylor, C., (1995), The Long Side of the Market and the Short End of the Stick: Bargaining Power and Price Formation in Buyers, Sellers and Balanced Markets, Quarterly Journal of Economics, 110: 837-855.