The labor wedge as a matching friction

- We decompose the labor wedge into three classes of frictions.
- We evaluate the role of each friction for the labor wedge and unemployment.
- The sources of fluctuations in the labor wedge and unemployment are different.
- The labor wedge is to a large extent determined by matching efficiency.
- Unemployment is accounted for by the combination of frictions to matching efficiency, job destruction and bargaining.

We use a search and matching model to decompose the labor wedge into three classes of labor market frictions and evaluate their role for the labor wedge and unemployment. We find that there is an asymmetric effect of labor market frictions on the labor wedge and unemployment. While the wedge is to a large extent explained by changes in matching efficiency, unemployment is accounted for by the combination of frictions to matching efficiency, job destruction and bargaining. If search and matching frictions give rise to the labor wedge, then it is relevant for explaining unemployment mainly through changes in matching efficiency.