Board of Governors of the Federal Reserve System

June 2018

Efficient Mismatch

David M. Arseneau and Brendan Epstein

Abstract:

This paper presents a model in which mismatch employment arises in a constrained efficient equilibrium. In the decentralized economy, however, mismatch gives rise to a congestion externality whereby heterogeneous job seekers fail to internalize how their individual actions affect the labor market outcomes of competitors in a common unemployment pool. We provide an analytic characterization of this distortion, assess the distributional nature of the associated welfare effects, and relate it to the relative productivity of low- and high-skilled workers competing for similar jobs.
Accessible materials (.zip)

Keywords: Labor market frictions, competitive search equilibrium, crowding in/out, skill-mismatch

DOI: https://doi.org/10.17016/FEDS.2018.037

PDF: Full Paper