Worker Heterogeneity and Endogenous Separations in a Matching Model of Unemployment Fluctuations
We model worker heterogeneity in the rents from being employed in a Diamond Mortensen Pissarides model of matching and unemployment. We show that heterogeneity, reflecting differences in match quality and worker assets, reduces the extent of fluctuations in separations and unemployment. We find that the model faces a trade off it cannot produce both realistic dispersion in wage growth across workers and realistic cyclical fluctuations in unemployment. (JEL D31, E24, E32, J41, J63)