We would like to thank the editor and two anonymous referees for constructive comments on a previous draft.
Unemployment and market size
Article first published online: 16 JUL 2013
© 2013 The Author(s). The Economic Journal © 2013 Royal Economic Society
The Economic Journal
Volume 124, Issue 575, pages 119–148, March 2014
How to Cite
Ellison, M., Keller, G., Roberts, K. and Stevens, M. (2014), Unemployment and market size. The Economic Journal, 124: 119–148. doi: 10.1111/ecoj.12043
- Issue published online: 17 MAR 2014
- Article first published online: 16 JUL 2013
- Accepted manuscript online: 27 MAR 2013 06:51AM EST
- Manuscript Accepted: 22 FEB 2013
- Manuscript Received: 5 JAN 2011
Without strong empirical support, labour market matching models typically assume constant returns to scale in matching. We construct a tractable equilibrium random matching model with a general matching technology, introducing market size effects: the job-finding rate varies with unemployment. Stable steady-states may occur in regions of increasing or decreasing returns, and multiple equilibria are welfare-ranked by market size. While the standard model relies on high-frequency shocks to the steady state to explain the co-movement of unemployment and job-finding, locally decreasing returns in matching generate plausible adjustment dynamics and slower convergence. Lastly, an extension of the Hosios condition internalises search externalities.