Because the data show that market tightness is not orthogonal to unemployment, this paper identifies the many empirical difficulties caused by adopting the free entry of vacancies assumption in the Diamond- Mortensen-Pissarides (DMP) framework. Relaxing the free entry assumption and using Simulated Method of Moments (SMM) finds the vacancy creation process is less than infinitely elastic. Because a recession- leading job separation shock then causes vacancies to fall as unemployment increases, the ad hoc restriction to zero job separation shocks (to generate Beveridge curve dynamics) becomes redundant. In contrast to standard arguments, the calibrated model finds the job separation process drives unemployment volatility over the cycle.
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)