NEW MICROFOUNDATIONS FOR THE AGGREGATE MATCHING FUNCTION

Empirical studies of the aggregate labor market matching function have favored a Cobb-Douglas functional form, for which there are no microfoundations in the existing literature. I present a new model for the matching process, based on a "telephone-line" Poisson queuing process, which, unlike other microeconomic approaches, can be integrated directly into standard theoretical search models. This implies a CES matching function, approximately Cobb-Douglas when search costs are approximately linear. The model allows empirical estimates of matching function parameters to be interpreted in terms of the costs and benefits of search. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.