Vacancies and Unemployment in Australia

This article examines the extent to which the Mortensen–Pissarides model of labour market search can quantitatively match business cycle fluctuations in Australia. With productivity and job‐separation‐rate shocks, the model fails to produce substantial volatility among unemployment or vacancies, a result similar to Shimer's (2005) findings for the United States. Examining a broader range of shocks significantly increases the magnitude of business cycle fluctuations, but still only explains roughly 25 per cent of labour market volatility. The implied volatility of wages in the model is similar to that in the data and hence excessive wage flexibility is unlikely to be central to the failure of the model as claimed in the literature.     

SKILL REQUIREMENTS,SEARCH FRICTIONS,AND WAGE INEQUALITY*

We analyze wage inequality, extending the Burdett and Mortensen (International Economic Review 39 (1998), 257–73) model by incorporating worker heterogeneity through skill requirements. We provide sufficient conditions for existence of an equilibrium where more productive firms offer higher wages. The unique such equilibrium is characterized in a closed form solution. Both within‐ and between‐group inequality are explicitly calculated. We then calibrate the model to explain the joint movement of both within‐ and between‐group inequality in the late 1980s and 1990s, an explanation that has been elusive in the literature so far.