Diamond-Mortensen-Pissarides Search-Matching Model
Also known as: DMP Model, Search and Matching Model, Mortensen-Pissarides Model
The Diamond-Mortensen-Pissarides (DMP) model, developed by Peter Diamond, Dale Mortensen, and Christopher Pissarides in the early 1980s, is a fundamental framework for understanding labor market dynamics through the lens of search and matching frictions. It explains how workers and firms meet, form employment relationships, and separate, endogenously determining unemployment, vacancies, and wages.
Key highlights
- Provides a unified framework for simultaneous unemployment and vacancy rates.
- Endogenizes job creation and destruction, explaining cyclical variation in employment flows.
- Natural microfoundation for wage bargaining with surplus-sharing.
- Tractable and widely used in applied macroeconomics and policy analysis.
Intuition
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How it works
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When to use it
Use the DMP model when analyzing labor market dynamics, unemployment, job creation and destruction, or wage bargaining. It is essential for understanding labor market responses to productivity shocks, policy changes, or demographic shifts. Use it when frictions (search, matching costs) and endogenous job creation are important. It is less suited to cross-sectional wage inequality, which may require richer heterogeneity.
Strengths & limitations
- Provides a unified framework for simultaneous unemployment and vacancy rates.
- Endogenizes job creation and destruction, explaining cyclical variation in employment flows.
- Natural microfoundation for wage bargaining with surplus-sharing.
- Tractable and widely used in applied macroeconomics and policy analysis.
- Wage bargaining outcomes depend on assumptions (e.g., Nash vs. take-it-or-leave-it) that can significantly alter results.
- The matching function is often treated as a black box; actual matching processes may be more complex.
- Requires calibration of structural parameters (matching elasticity, separation rates) which are difficult to estimate directly.
- Limited ability to explain wage dispersion or occupational mobility with a single wage distribution.
Common pitfalls
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Applications
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Frequently asked
Why does the DMP model predict both unemployment and vacancies at equilibrium?
Because matching is frictional and time-consuming. At any moment, some unemployed workers have not yet found jobs (unemployment), and some firms have not yet found workers (vacancies). The equilibrium balances firms' incentive to create jobs against the costs of posting vacancies and waiting for matches.
How do wages get determined in the DMP model?
After a successful match, the worker and firm bargain over the division of the match surplus. Under Nash bargaining (the standard assumption), the wage lies between the worker's reservation wage (alternative of unemployment) and the firm's reservation value (alternative of an unfilled vacancy). The bargaining power of each party determines the split.
What is the matching function, and why does it matter?
The matching function describes how unemployed workers and vacant jobs are brought together. It typically depends on both unemployment and vacancy rates. The elasticity of this function determines how responsive job-finding rates are to the tightness of the labor market (vacancies per worker). This elasticity is crucial for predicting policy effects.
Can the DMP model explain persistent wage inequality?
The standard DMP model with homogeneous workers produces a single wage distribution. To explain persistent wage inequality, extensions include worker heterogeneity (e.g., skill differences), employer heterogeneity (e.g., productivity), or both. These extensions create a distribution of wage offers and individual wages.
Sources
- 1.Mortensen, D. T., & Pissarides, C. A. (1994). Job Reallocation, Employment Fluctuations and Unemployment. In J. B. Taylor & M. Woodford (Eds.), Handbook of Macroeconomics, 1A, 1171–1227.
- 2.Diamond, P. A. (1982). Wage Determination and Efficiency in Search Equilibrium. Review of Economic Studies, 49(2), 217–227.
- 3.Pissarides, C. A. (1985). Short-Run Equilibrium Dynamics of Unemployment, Vacancies, and Real Wages. American Economic Review, 75(4), 676–690.
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Cite this page
ScholarGate. (2026, June 3). Diamond-Mortensen-Pissarides Search-Matching. ScholarGate. https://scholargate.app/economics/diamond-mortensen-pissarides-search-matching