Markovian networks in labour markets

Abstract

In labour theory, equilibrium is described in terms of mean variables, which is limited and can be misleading. In this article, we model the labour market as a closed Markovian network and find the steady state distribution of unemployment and advertised vacancies. We determine the stochastic equilibrium distribution for two different types of matching functions and allow for both unemployed and on the job search. In general cases, where probabilities cannot be analytically computed, we find restrictions that must hold for all matching processes. Our modelling is applicable to most economic markets with frictions.

Keywords:

• Markov networks
• labour market
• matching function
• equilibrium distributions

Acknowledgements

We thank Professor C Pissarides for his comments and suggestions on an earlier version of this paper. We also thank an anonymous referee for his or her interesting and useful comments. We acknowledge the support of DGYCIT Grants: BFM2002-02189 and BFM2003-08204.