Vacancies and Unemployment in Australia |
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| Authors: | Phillip Chindamo Lawrence Uren |
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| Institution: | 1. Department of Economics, The University of Melbourne;2. The authors are grateful to Andrew Clarke, Don Harding and David Harris for useful discussions. We would also like to thank Robert Dixon for providing data on Australian labour market flows, and Robert Shimer for useful comments and for making his Mathematica code available. The views expressed are those of the authors and should not be attributed to the Victorian Department of Premier and Cabinet or the Victorian Government. This work was initiated while Phillip Chindamo was affiliated with the Department of Economics, University of Melbourne, but completed while he was at the Victorian Department of Premier and Cabinet. |
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| Abstract: | 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. |
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