A competitive theory of mismatch

Abstract

I study the distributions of unemployment, vacancies, and wages across local labor markets in an economy where workers and jobs are matched and mismatched based on more explicit assumptions and aggregation principles than in the reduced-form aggregate matching-function approach. The endogenous matching process formulated here is flexible and has practical value for applied work. Local and aggregate labor market adjustments to local productivity and aggregate demand shocks reproduce empirical Beveridge and wage curve patterns, offer an alternative perspective on empirical indices of mismatch unemployment, and deliver an endogenous and commonly used reduced-form aggregate matching function.