Combining labor flows into the search and matching model

In our newest paper, which just appeared in Bank&Credit we combine the standard search and machting model as introduced by Diamond, Mortensen and Pissarides with one of the feautures of the reallocation process that took place in Eastern European and Former Soviet Union countries – namely flows from the public to the private sector due to the closure of inefficient state-owned enterprises and the associated decline of employment in the public sector, combined with the emergence of an allegedly efficient private sector. The theoretical background for this transformation is described by the model of Aghion and Blanchard (1994).

We construct a theoretical model combing these two approaches and use data for Poland to simulate it. We show that faster transition (associated with a faster restructuring of state-owned enterprises) leads to a quicker convergence to the post-transitional equilibrium characterized by high GDP and high employment in the private sector. Faster transition is also related to higher welfare as the level of higher GDP is reached faster. Nonetheless, this comes at the cost of negative output growth and higher unemployment in the short run.

Full paper: Cichocki and Kopiec (2017), Modelling labour reallocation during the Polish transition: a search-and-matching approach, Bank&Credit.