Beveridge Curve Under Endogenous Separation Model : The Role of Wage Rigidity and Match-Specific Productivity

A standard endogenous separation model developed by Mortensen and Pissarides [1994] has a drawback in replicating the negative correlation between unemployment and vacancies. To address this, I extend the model by incorporating wage rigidity and modifying the assumption about idiosyncratic match-specific productivity. The results indicate that introducing wage rigidity can produce the Beveridge curve, although the degree of negative correlation is slightly lower than in the data. Modifying the model to randomly draw match-specific productivity for new matches also increases the degree of negative correlation between unemployment and vacancy rates