revised version published as "Search, mismatch and unemployment" in: European Economic Review, 2008, 52 (3), 498-526
This paper analyses the efficiency of the equilibrium allocation in a matching model with two
types of workers and jobs. The basic assumption is that high-skill workers can perform both
skilled and unskilled jobs, while low-skill workers can only perform unskilled jobs. Our first
result shows that the equilibrium with ex-post bargaining is never efficient. Second, under
Hosios’ (1990) condition we show that high-skill workers are under-valued in equilibrium,
while the opposite holds for low-skill workers. Firms therefore tend to create too few unskilled
jobs, resulting in a suboptimally high unemployment rate for low-skill workers. We show that
these results generalize to environments with more types of agents and different production
technologies. Finally, in an extension we derive a tax scheme that restores efficiency and we
show how workers’ bargaining strength affects unemployment and skill-mismatch.
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