The Beveridge Curve, Matching, and Labour Market Flows: A Reinterpretation

Abstract

A standard theory of the Beveridge curve is based on the matching function: when unemployment is high, vacancies are filled quickly, so fewer vacancies are needed to balance the inflow into unemployment. Estimating matching functions on panel data, we find no (or very weak) evidence that vacancies are filled quickly when unemployment is high. A model with on-the-job search can explain the Beveridge curve when vacancies are filled at a constant rate: when unemployment is high, unemployed job seekers fill a larger share of the vacancies, so fewer vacancies are needed to balance the inflow into unemployment.