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.