Finance and Economics Discussion Series (FEDS)
David M. Arseneau and Brendan Epstein
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.
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Keywords: Labor market frictions, competitive search equilibrium, crowding in/out, skill-mismatch
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