Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland

Markku Talonen

doi:doi:10.11648/j.ijber.20211005.14

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Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland

Markku Talonen

Published in International Journal of Business and Economics Research (Volume 10, Issue 5)

Received: 9 September 2021 Accepted: 8 October 2021 Published: 21 October 2021

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Abstract

This study contributes to the literature on the efficiency of regional labor markets using matching function to model labor markets and nonparametric methods DEA and FDH to measure efficiency of those markets. DEA has been the most popular method in empirical studies measuring efficiency for an industry and there is also a literature applying DEA to study the efficiency of labor markets. However, this literature neglects two problems important for consistent estimation of a matching function: the possible endogeneity of inputs and non-convexity of the production set. Endogeneity manifests as correlation between inputs and efficiencies. In this paper, we first analyze whether the inputs of the matching function or unemployed jobseekers and open vacancies are exogenous. As our results do not reject exogeneity, we continue treating these inputs exogenous. Next, we evaluate convexity of production set. Testing convexity is an important prerequisite for the use of DEA, because DEA assumes convexity and supplies consistent efficiencies only when the production set is convex. However, convexity is rarely assessed when DEA is applied. In this paper, we evaluate convexity of the production set of the matching function. We use several tests including ones that are based on recently proposed central limit theorems for moments of DEA and FDH estimators. Out of ten tests performed, six ones reject convexity while four ones do not. The tests leave us with a strong belief in non-convexity, and this directs us to apply FDH instead of DEA in the sequel, when we study congestion of inputs. We find strong congestion of open vacancies concerning Helsinki travel-to-work area for several years. In 2017 the loss of matches due to congestion was more than 20 000, amounting to 2.5% of the labor force in Helsinki region, 0.8% in the whole country. Our research with data on 113 travel-to-work areas and 15 public employment (TE-) offices in 2007–19 in Finland, shows huge differences in labor market situation between regions, especially Helsinki and the rest of the country, calling attention from the decision-makers both in firms and government. Also, our study emphasizes the need to pretest data for exogeneity and convexity before applying DEA.

Published in	International Journal of Business and Economics Research (Volume 10, Issue 5)
DOI	10.11648/j.ijber.20211005.14
Page(s)	187-202
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

Matching Function, Regional Labor Markets, Efficiency, FDH, DEA, Convexity, Congestion

References

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Markku Talonen. (2021). Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland. International Journal of Business and Economics Research, 10(5), 187-202. https://doi.org/10.11648/j.ijber.20211005.14

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Markku Talonen. Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland. Int. J. Bus. Econ. Res. 2021, 10(5), 187-202. doi: 10.11648/j.ijber.20211005.14

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Markku Talonen. Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland. Int J Bus Econ Res. 2021;10(5):187-202. doi: 10.11648/j.ijber.20211005.14

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@article{10.11648/j.ijber.20211005.14,
  author = {Markku Talonen},
  title = {Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland},
  journal = {International Journal of Business and Economics Research},
  volume = {10},
  number = {5},
  pages = {187-202},
  doi = {10.11648/j.ijber.20211005.14},
  url = {https://doi.org/10.11648/j.ijber.20211005.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijber.20211005.14},
  abstract = {This study contributes to the literature on the efficiency of regional labor markets using matching function to model labor markets and nonparametric methods DEA and FDH to measure efficiency of those markets. DEA has been the most popular method in empirical studies measuring efficiency for an industry and there is also a literature applying DEA to study the efficiency of labor markets. However, this literature neglects two problems important for consistent estimation of a matching function: the possible endogeneity of inputs and non-convexity of the production set. Endogeneity manifests as correlation between inputs and efficiencies. In this paper, we first analyze whether the inputs of the matching function or unemployed jobseekers and open vacancies are exogenous. As our results do not reject exogeneity, we continue treating these inputs exogenous. Next, we evaluate convexity of production set. Testing convexity is an important prerequisite for the use of DEA, because DEA assumes convexity and supplies consistent efficiencies only when the production set is convex. However, convexity is rarely assessed when DEA is applied. In this paper, we evaluate convexity of the production set of the matching function. We use several tests including ones that are based on recently proposed central limit theorems for moments of DEA and FDH estimators. Out of ten tests performed, six ones reject convexity while four ones do not. The tests leave us with a strong belief in non-convexity, and this directs us to apply FDH instead of DEA in the sequel, when we study congestion of inputs. We find strong congestion of open vacancies concerning Helsinki travel-to-work area for several years. In 2017 the loss of matches due to congestion was more than 20 000, amounting to 2.5% of the labor force in Helsinki region, 0.8% in the whole country. Our research with data on 113 travel-to-work areas and 15 public employment (TE-) offices in 2007–19 in Finland, shows huge differences in labor market situation between regions, especially Helsinki and the rest of the country, calling attention from the decision-makers both in firms and government. Also, our study emphasizes the need to pretest data for exogeneity and convexity before applying DEA.},
 year = {2021}
}

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TY  - JOUR
T1  - Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland
AU  - Markku Talonen
Y1  - 2021/10/21
PY  - 2021
N1  - https://doi.org/10.11648/j.ijber.20211005.14
DO  - 10.11648/j.ijber.20211005.14
T2  - International Journal of Business and Economics Research
JF  - International Journal of Business and Economics Research
JO  - International Journal of Business and Economics Research
SP  - 187
EP  - 202
PB  - Science Publishing Group
SN  - 2328-756X
UR  - https://doi.org/10.11648/j.ijber.20211005.14
AB  - This study contributes to the literature on the efficiency of regional labor markets using matching function to model labor markets and nonparametric methods DEA and FDH to measure efficiency of those markets. DEA has been the most popular method in empirical studies measuring efficiency for an industry and there is also a literature applying DEA to study the efficiency of labor markets. However, this literature neglects two problems important for consistent estimation of a matching function: the possible endogeneity of inputs and non-convexity of the production set. Endogeneity manifests as correlation between inputs and efficiencies. In this paper, we first analyze whether the inputs of the matching function or unemployed jobseekers and open vacancies are exogenous. As our results do not reject exogeneity, we continue treating these inputs exogenous. Next, we evaluate convexity of production set. Testing convexity is an important prerequisite for the use of DEA, because DEA assumes convexity and supplies consistent efficiencies only when the production set is convex. However, convexity is rarely assessed when DEA is applied. In this paper, we evaluate convexity of the production set of the matching function. We use several tests including ones that are based on recently proposed central limit theorems for moments of DEA and FDH estimators. Out of ten tests performed, six ones reject convexity while four ones do not. The tests leave us with a strong belief in non-convexity, and this directs us to apply FDH instead of DEA in the sequel, when we study congestion of inputs. We find strong congestion of open vacancies concerning Helsinki travel-to-work area for several years. In 2017 the loss of matches due to congestion was more than 20 000, amounting to 2.5% of the labor force in Helsinki region, 0.8% in the whole country. Our research with data on 113 travel-to-work areas and 15 public employment (TE-) offices in 2007–19 in Finland, shows huge differences in labor market situation between regions, especially Helsinki and the rest of the country, calling attention from the decision-makers both in firms and government. Also, our study emphasizes the need to pretest data for exogeneity and convexity before applying DEA.
VL  - 10
IS  - 5
ER  -

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Markku Talonen

Faculty of Social Sciences, University of Helsinki, Helsinki, Finland

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Markku Talonen. (2021). Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland. International Journal of Business and Economics Research, 10(5), 187-202. https://doi.org/10.11648/j.ijber.20211005.14

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Markku Talonen. Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland. Int. J. Bus. Econ. Res. 2021, 10(5), 187-202. doi: 10.11648/j.ijber.20211005.14

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Markku Talonen. Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland. Int J Bus Econ Res. 2021;10(5):187-202. doi: 10.11648/j.ijber.20211005.14

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@article{10.11648/j.ijber.20211005.14,
  author = {Markku Talonen},
  title = {Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland},
  journal = {International Journal of Business and Economics Research},
  volume = {10},
  number = {5},
  pages = {187-202},
  doi = {10.11648/j.ijber.20211005.14},
  url = {https://doi.org/10.11648/j.ijber.20211005.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijber.20211005.14},
  abstract = {This study contributes to the literature on the efficiency of regional labor markets using matching function to model labor markets and nonparametric methods DEA and FDH to measure efficiency of those markets. DEA has been the most popular method in empirical studies measuring efficiency for an industry and there is also a literature applying DEA to study the efficiency of labor markets. However, this literature neglects two problems important for consistent estimation of a matching function: the possible endogeneity of inputs and non-convexity of the production set. Endogeneity manifests as correlation between inputs and efficiencies. In this paper, we first analyze whether the inputs of the matching function or unemployed jobseekers and open vacancies are exogenous. As our results do not reject exogeneity, we continue treating these inputs exogenous. Next, we evaluate convexity of production set. Testing convexity is an important prerequisite for the use of DEA, because DEA assumes convexity and supplies consistent efficiencies only when the production set is convex. However, convexity is rarely assessed when DEA is applied. In this paper, we evaluate convexity of the production set of the matching function. We use several tests including ones that are based on recently proposed central limit theorems for moments of DEA and FDH estimators. Out of ten tests performed, six ones reject convexity while four ones do not. The tests leave us with a strong belief in non-convexity, and this directs us to apply FDH instead of DEA in the sequel, when we study congestion of inputs. We find strong congestion of open vacancies concerning Helsinki travel-to-work area for several years. In 2017 the loss of matches due to congestion was more than 20 000, amounting to 2.5% of the labor force in Helsinki region, 0.8% in the whole country. Our research with data on 113 travel-to-work areas and 15 public employment (TE-) offices in 2007–19 in Finland, shows huge differences in labor market situation between regions, especially Helsinki and the rest of the country, calling attention from the decision-makers both in firms and government. Also, our study emphasizes the need to pretest data for exogeneity and convexity before applying DEA.},
 year = {2021}
}

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TY  - JOUR
T1  - Testing Endogeneity, Convexity and Congestion in a Matching Function: Evidence from Finland
AU  - Markku Talonen
Y1  - 2021/10/21
PY  - 2021
N1  - https://doi.org/10.11648/j.ijber.20211005.14
DO  - 10.11648/j.ijber.20211005.14
T2  - International Journal of Business and Economics Research
JF  - International Journal of Business and Economics Research
JO  - International Journal of Business and Economics Research
SP  - 187
EP  - 202
PB  - Science Publishing Group
SN  - 2328-756X
UR  - https://doi.org/10.11648/j.ijber.20211005.14
AB  - This study contributes to the literature on the efficiency of regional labor markets using matching function to model labor markets and nonparametric methods DEA and FDH to measure efficiency of those markets. DEA has been the most popular method in empirical studies measuring efficiency for an industry and there is also a literature applying DEA to study the efficiency of labor markets. However, this literature neglects two problems important for consistent estimation of a matching function: the possible endogeneity of inputs and non-convexity of the production set. Endogeneity manifests as correlation between inputs and efficiencies. In this paper, we first analyze whether the inputs of the matching function or unemployed jobseekers and open vacancies are exogenous. As our results do not reject exogeneity, we continue treating these inputs exogenous. Next, we evaluate convexity of production set. Testing convexity is an important prerequisite for the use of DEA, because DEA assumes convexity and supplies consistent efficiencies only when the production set is convex. However, convexity is rarely assessed when DEA is applied. In this paper, we evaluate convexity of the production set of the matching function. We use several tests including ones that are based on recently proposed central limit theorems for moments of DEA and FDH estimators. Out of ten tests performed, six ones reject convexity while four ones do not. The tests leave us with a strong belief in non-convexity, and this directs us to apply FDH instead of DEA in the sequel, when we study congestion of inputs. We find strong congestion of open vacancies concerning Helsinki travel-to-work area for several years. In 2017 the loss of matches due to congestion was more than 20 000, amounting to 2.5% of the labor force in Helsinki region, 0.8% in the whole country. Our research with data on 113 travel-to-work areas and 15 public employment (TE-) offices in 2007–19 in Finland, shows huge differences in labor market situation between regions, especially Helsinki and the rest of the country, calling attention from the decision-makers both in firms and government. Also, our study emphasizes the need to pretest data for exogeneity and convexity before applying DEA.
VL  - 10
IS  - 5
ER  -

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