Understanding European unemployment with matching and search-island models

Lars Ljungqvist, Thomas J. Sargent

    Research output: Contribution to journalArticlepeer-review


    To understand European and American unemployment during the last 60 years, we use a search-island model and four matching models with workers who have heterogeneous skills and entitlements to government benefits. When there is higher turbulence, in the sense of worse skill transition probabilities for workers who suffer involuntary layoffs, high government mandated unemployment insurance (UI) and employment protection (EP) in Europe increase unemployment rates and durations. But when there is lower turbulence, high European EP suppresses unemployment rates despite high European UI. Four matching models differ in how they assign unemployed workers to matching functions. That affects how strongly unemployment responds to increases in turbulence. Heterogeneity among unemployed workers highlights the central role of adverse labor market externalities in matching models and reveals that the cost of posting vacancies is the lynchpin of a matching model.

    Original languageEnglish (US)
    Pages (from-to)2139-2179
    Number of pages41
    JournalJournal of Monetary Economics
    Issue number8
    StatePublished - Nov 2007


    • Employment protection
    • Matching
    • Search
    • Turbulence
    • Unemployment insurance

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics


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