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Heterogeneity And Cyclical Unemployment

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Executive Summary

The authors model worker heterogeneity in the rents from being employed in a Diamond-Mortensen-Pissarides model of matching and unemployment. They show that heterogeneity, reflecting differences in match quality and worker assets, reduces the extent of fluctuations in separations and unemployment. They find that the model faces a trade-off - it cannot produce both realistic dispersion in wage growth across workers and realistic cyclical fluctuations in unemployment. They shed light on this question by considering endogenous separations. They introduce heterogeneity in reservation wages into a business cycle model of separations, matching, and unemployment.

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