An Essay on the Three-State Matching Model of Labour Flow

This thesis employs a calibrated Diamond-Mortensen-Pissarides (DMP) model, also known as matching model, by considering out-of-the-labour-force individuals into the analysis. While the conventional DMP model considers all individuals within the work-force, this thesis o↵ers di↵erent perspective by taking into account that some individuals voluntarily decide to be out of the labour market. Much scrutiny is put on the search-ing behaviour of individuals and firms that shape the equilibrium (un)employment rate in our model. We consider three separate scenarios for our general equilibrium model; when agents are assumed to be homogenous, heterogenous, and heterogenous and naı¨ve, respectively. Our finding informs that the distinction between involuntary and voluntary unemployment provides an interesting consideration for policy analyses.