A Competitive Theory of Mismatch

This paper studies a general equilibrium island model of mismatch and examines the stationary properties of the equilibrium. Aggregate demand is uncertain and market participants cannot instantaneously adjust to changes in demand. Changes in technological and demand conditions trigger capital and labor reallocations that increase aggregate unemployment and vacancies. Mismatch increases due to higher dispersion of unemployment and vacancies across locations, and because the number of unemployed workers and vacant jobs in different locations increases. The theory provides an explanation for the shifts in the Beveridge curve consistent with microeconomic evidence on labor market dispersion