Chronic Underemployment And Regression Towards the Mean
The standard presumption regarding unemployment generated by search is that it is efficient (Robert Hall, 1979a; E. Prescott, 1975). But this conclusion is based on an incomplete notion of the role of search. Previous work on the subject, by not recognizing that search assigns workers to jobs, has neglected to study the assignment brought about by search and has ruled out the phenomenon of regression towards the mean. This phenomenon distorts the assignment of workers to jobs in a systematic way and produces chronic underemployment (excessive unemployment) of less skilled workers. Although the job matching literature (Boyan Jovanovic, 1979; Dale Mortensen, 1976) has incorporated some of the allocative role of search, it has not specified the heterogeneous nature of the workers and firms to be assigned to each other, with the result that regression towards the mean cannot arise.
KeywordsLabor Market Marginal Product Search Cost Average Grade Reservation Wage
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