Accounting for endogeneity in matching function estimation

We show that equilibrium matching models imply that standard estimates of the matching function elasticities are exposed to an endogeneity bias, which arises from the search behavior of agents on either side of the market. We offer an estimation method which, under certain structural assumptions about the process driving shocks to matching efficiency, is immune from that bias. Application of our method to the estimation of a basic version of the matching function using aggregate U.S. data from the Job Openings and Labor Turnover Survey (JOLTS) suggests that the bias can be quantitatively important.

► Matching models imply that standard estimates of the matching function are biased. ► The bias arises from endogenous search by agents on both sides of the market. ► We offer an estimation method which is immune from that bias. ► Application of our method suggests that the bias is quantitatively important.