Abstract

This paper studies whether the Mortensen and Pissarides (MP) search and matching model can explain the observed labor market fluctuations in Japan. Although the MP model correctly predicts the observed regularities in the cyclical fluctuations of unemployment and job vacancies, it cannot generate the observed unemployment and vacancy fluctuations in response to productivity shock of reasonable size. I incorporate separation shocks and training costs into the MP model, finding that their inclusions do not significantly improve the ability of the model to explain the cyclical volatility of unemployment and vacancies observed in the Japanese labor market. This paper also provides the business-cycle properties of the Japanese labor market.