Structural and frictional unemployment in an equilibrium search model with heterogeneous agents

Abstract

We specify and estimate an equilibrium search model with between‐market heterogeneity in the productivity levels. The model allows for two types of unemployment: unemployment due to search frictions and unemployment due to wage floors. Wage floors may exist, because of large unemployment benefits or a binding (mandatory) minimum wage. Using data on labour market histories for a sample of Dutch workers, we decompose the total unemployment rate in a structural and frictional unemployment rate. We also discuss the effect of changes in the minimum wage. Copyright © 1995 John Wiley & Sons, Ltd.