Paolo Martellini

Research Paper

Declining Search Frictions, Unemployment and Growth (with Guido Menzio​​​​​​​), R&R at Journal of Political Economy

The Diamond-Mortensen-Pissarides theory argues that unemployment and vacancies emerge because of search frictions in the labor market. Yet, over the last century, US unemployment and vacancy rates show no trend, even though search efficiency in the labor market must have improved thanks to the diffusion of telephones, computers and the Internet. We resolve this puzzle using a search model where firm-worker matches are inspection goods. We show that iff the distribution of idiosyncratic productivity for new matches is Pareto, then unemployment, vacancy, job-finding and job-loss rates remain constant while the efficiency of search grows over time. Improvements in search technology show up in productivity growth. A corollary of our theory is that population growth does not affect unemployment and vacancy rates even under non-constant returns to scale in the search process. We develop and implement a strategy to measure the growth rate of the search technology, the returns to scale of the search process, and their contribution to productivity growth.

JEL Codes: E24, O40, R11.
Keywords: Search frictions, Unemployment, Growth, Agglomeration.

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Revisiting the Hypothesis of High Discounts and High Unemployment (with Guido Menzio and Ludo Visschers)

We revisit the hypothesis that labor market fluctuations are driven by shocks to the discount rate. Using a model in which the UE and the EU rates are endogenous, we show that an increase in the discount rate leads to a decline in both the UE and the EU rates. In the data, though, the UE and EU rates move against each other at business cycle frequency. Using a lifecycle model with human capital accumulation on the job, we show that an increase in the discount rate does indeed lead to a decline in the aggregate UE rate and to an increase in the aggregate EU rate. However, the decline in the UE rate is larger for younger workers than for older workers and the EU rate increases only for younger workers. In the data, fluctuations in the UE and EU rates at the business cycle frequency are nearly identical across age groups.

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Paolo Martellini

Start Date
2014
Email
paoloma@sas.upenn.edu
Office Location
PCPSE 641

Working Papers