No. 538 - An empirical micro matching model with an application to Italy and Spain

A large literature investigates the role of frictions in explaining labour market dynamics. Their presence is often summarized by an aggregate matching function relating the number of job matches to total unemployment and total vacancies. Most empirical specifications, however, are only reduced forms with no micro-foundation. Further, for many countries, empirical research on the matching function cannot be carried out because data on vacancies are simply not available. This paper looks at a job match as a transition from non-employment to employment. This transition is decomposed into two parts, one determined by the matching technology and one by individual search intensity. We show how the micro-founded model of Pissarides (1979) can be identified using only microdata on labour market transitions. This enables us to obtain a measure of market tightness even without information on the demand side of the market. The method is then applied to estimating the Italian and Spanish matching functions using data from the quarterly labour force surveys.