An estimated search and matching model of the Japanese labor market

• Estimating a search and matching model for the Japanese labor market.
• A matching model with a convex vacancy cost and a separation shock is developed.
• The model fits the data on unemployment and vacancies remarkably well.

This paper studies how well a simple search and matching model can describe aggregate Japanese labor market dynamics in a full information setting. We develop a discrete-time search and matching model with a convex vacancy posting cost and three shocks: productivity, separation, and markup shocks. We use the model as a data-generating process for our empirical analysis and estimate it by using Bayesian methods. The model is successful in replicating the behavior of unemployment and vacancies in Japan. However, we also find that the success of the model relies on shock processes that are not empirically plausible.