Search and Matching in Structural Labour Supply modelling

This paper proposes a novel approach to modelling labour supply by integrating discrete-choice frameworks with search and matching frictions, effectively capturing both supply-side heterogeneity and demand-side constraints. By combining Random Utility-Random Opportunity models with a static search and matching framework, the model offers a realistic representation of involuntary unemployment and wage adjustments, addressing key limitations in the existing literature. Empirical analysis using data from selected EU countries demonstrates the model’s capability to reflect both supply and demand responses. The introduction of an in-work benefit scheme reveals substantial cross-country variation in labour supply reactions and fiscal outcomes, highlighting the critical role of demand-side adjustments in shaping policy effectiveness.