The hiring function reconsidered: on closing the circle

This paper is concerned with the matching of job searchers with vacant jobs: a key component of the dynamics of worker reallocation in the labour market. The job searchers may be unemployed, employed or not in the labour force and we estimate matching or hiring functions including all three groups. We show that previous studies, which ignore both employed job seekers and unemployed job seekers who are considered to be out of the labour force, produce biased estimates of the coefficients of interest. By considering the only unemployment outflows into jobs and ignorant interdependencies with other flows, these studies overlook an important aspect of job matching. Our estimates on Australian data support a more general approach and produce models that dominate those proposed previously. We also provide clear ranking preferences amongst job seekers in the hiring process: those already in jobs are more successful than the unemployed who are, in turn, more successful than those not in the labour force. Together these results demonstrate that the disaggregate worker flows and their interdependence are key features of the labour market and should be included in studies of the hiring process.