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RESEARCH PRODUCT

Regional Matching Frictions and Aggregate Unemployment

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This study demonstrates that a stochastic frontier approach applied to regional level data offers a convenient and interesting method to examine how regional differences in matching efficiency and structural factors contribute to aggregate unemployment. The study reveals notable and temporally stable differences in matching efficiency across travel-to-work areas in Finland. If all areas were as efficient as the most efficient one, the number of hirings would increase by about 40 per cent. This would reduce the aggregate unemployment rate from the current 8.5 per cent level to 6.0 per cent. If all the areas shared the same structural characteristics as the most favourable area, the aggregate unemployment rate would drop to 7.1 per cent.