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Screening and Labor Market Flows in a Model with Heterogeneous Workers

Authors


  • The authors would like to thank Wouter den Haan and seminar participants at the 2011 SCG Conference of the Swiss National Bank, the 15th T2M Conference on Theory and Methods in Macroeconomics, the University of Mannheim, McGill University, Paris School of Economics, and the University of Colorado, Boulder, for helpful comments.

Abstract

We construct a model in which screening of heterogeneous workers by employers plays a central role in determining both the flows into and out of unemployment. Following a negative productivity shock, the share of low-efficiency workers in the pool of unemployed rises, and this composition effect reduces the incentive of firms to post vacancies, lowering job opportunities for all workers. Heterogeneity in workers’ efficiency amplifies unemployment fluctuations in economies with small gross labor flows and leads to persistent buildups of unemployment and slow recoveries. The composition effect worsens the unemployment–inflation trade-off faced by the monetary authority, leading to very large sacrifice ratios when a fall in productivity primarily affects low-efficiency workers.

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