A Frictionless Model of Job Flows and the Beveridge Curve

The Diamond-Mortensen-Pissarides search and matching model is the workhorse of labor

macro, but it has difficulty in simultaneously matching the cyclical behavior of job loss and

vacancies when taken to the data. By completely ignoring frictions in job creation and

focusing instead on firm-level heterogeneity, one can match the cyclical behavior of job flows

and vacancies relatively well. In particular, one can generate a Beveridge Curve which looks

much like the real Beveridge Curve, and one can replicate the approximately equal

contributions of job creation and destruction to the cycle. Focusing on heterogeneity rather

than on hiring costs seems to give an improved picture of hiring activity over the cycle.