Stock-flow matching

This paper develops and quantifies the implications of the stock-flow matching model for unemployment, job vacancies, and worker flows. Workers and jobs are heterogeneous, so most worker-job pairs cannot profitably match, leading to the coexistence of unemployed workers and job vacancies. Productivity shocks cause fluctuations in the number of active jobs, which in turn cause fluctuations in labor market outcomes. We derive exact expressions for employment and worker transition rates in a finite economy and analyze their limiting behavior in a large economy. A calibrated version of the model is consistent with the co-movement of labor market variables observed in U.S. data and can explain about one third of their volatility. ∗We are grateful for comments from seminar participants at the Federal Reserve Banks of Minneapolis and New York, the 2006 SED Annual Meetings, and the 2006 NBER Summer Institue. Shimer’s research is supported by a grant from the National Science Foundation.