The Pervasive Importance of Tightness in Labor-Market Volatility

A distinctive contribution of the unemployment model of Diamond, Mortensen, and Pissarides is the creation of an economically coherent concept of labor-market tightness. In a tighter market, jobseekers find jobs more quickly and employers take longer to fill jobs. The evidence in this paper on individual job-finding rates and on job-filling rates of employers shows that a single index factor describes tightness. Jobfinding rates and jobfilling rates move in parallel as functions of the single index. We account for heterogeneity in both rates. For the jobfinding rate, we use success rates for jobseekers over one-month and 12-month periods of potential search in data from the Current Population Survey, and we distinguish 16 categories of jobseekers, based on their activities and experiences leading up to the measurement date. For the jobfilling rate, we use the ratio of hires to job openings in the Job Openings and Labor Turnover Survey, distinguishing between 16 industries. We conclude that the DMP model’s concept of tightness is central to the understanding of fluctuations in unemployment and thus in employment and output. We show that our index of labor-market tightness is highly correlated with movements of total hours of work and substantially correlated with movements of aggregate output, although noncyclical influences—total factor productivity and labor-force participation—are important sources of output volatility as well.