The matching function has become a standard tool in modelling search activities of job-seekers and firms in labour markets. By analogy to the aggregate production function, it relates the number of matches over some time interval to the pool of unemployed and posted vacancies at the beginning of the respective time interval. In Discussion Paper No. 1364, Research Fellow Michael Burda and Stefan Profit modify the matching approach to account for spatial spillovers between local entities and interpret the matching function as a way of assessing the importance of labour mobility in the Czech Republic. To motivate their empirical strategy, they derive a modified matching function from a stylized model of non-sequential search with endogenized search intensity, where job search activities of workers and firms affect the matching process in neighbouring locales by changing the relevant pools of job-seekers and job-openings.

In this model, matches are exclusively mediated through local employment offices in each district in a ‘bulletin board’ fashion, i.e. firms submit vacancies to an employment office and workers apply by simply selecting job offers from the bulletin board. In Burda and Profit’s spatial extension of this simple model, job search occurs in two dimensions: first, the unemployed decide whether to engage in job search in particular districts; and second, they determine their search intensity in each of these districts expressed by the number of interviews chosen, taking the probability of finding a job per interview as given. The empirical importance of spatial correlation in the aggregate matching function is investigated using a monthly panel of registered unemployment, vacancies, and gross exits from unemployment into employment from 76 district labour market offices in the Czech Republic between January 1992 and July 1994. The authors find a statistically significant non-uniform impact of surrounding districts on local matching, even after controlling for boundaries and sectoral heterogeneity. Constant returns for this modified matching function cannot, however, be rejected in most cases.

Matching Across Space: Evidence on Mobility in the Czech Republic
Michael C Burda and Stefan Profit