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Economic Quarterly

Second Quarter 2016

Generalized Matching Functions and Resource Utilization Indices for the Labor Market

Andreas Hornstein and Marianna Kudlyak

In the U.S. labor market, unemployed individuals who are actively looking for work are more than three times as likely to become employed than those individuals who are not actively looking for work and are considered to be out of the labor force (OLF). Yet, on average, every month twice as many people make the transition from OLF to employment than make the transition from unemployment to employment. Based on these observations, we have argued in Hornstein, Kudlyak, and Lange (2014) for an alternative measure of resource utilization in the labor market, a nonemployment index (NEI), that is more comprehensive than the standard unemployment rate. In this article, we show how the NEI fits into recent extensions of the matching function (which is a standard macroeconomic approach to model labor markets with frictions), how it affects estimates of the extent of labor market frictions, and how these frictions have changed in the Great Recession.


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