Worker Heterogeneity and Endogenous Separations in a Matching Model of Unemployment Fluctuations

Wemodel worker heterogeneity in the rents from being employed in a Diamond-Mortensen-Pissarides model of matching and unemployment. We show that heterogeneity, reecting di¤erences in match quality and worker assets, reduces the extent of uctuations in sep-arations and unemployment. We \u85nd that the model faces a trade-o¤it cannot produce both realistic dispersion in wage growth across workers and realistic cyclical uctuations in unemployment. We thank Evgenia Dechter for her excellent research assistance; we thank Mark Aguiar, Ricardo Lagos, Iourii Manovskii, and Randy Wright for helpful suggestions