The labour market matching efficiency in Australian regions

Abstract We advance the literature on estimating job matching functions in two ways. Scholars acknowledge that past matching efficiency affects current job search and posting behaviour (i.e. tightness is endogenous); however, they so far ignore that forecast (lead) matching efficiency may also affect tightness. We specify a model that accommodates lagged and lead efficiency to address both endogeneity channels. Scholars also acknowledge that matching efficiency may be region‐specific; however, a test to formally evaluate matching heterogeneity is missing, for which we develop a ‐distributed test statistic. Using regional Australian data, we (i) demonstrate that lead matching efficiency indeed endogenizes labour market tightness, and (ii) confirm matching heterogeneity in the Australian regional context. Both innovations have policy relevance, and their application will improve matching efficiency estimates and provide policymakers with a tool to test whether region‐specific labour market policy is warranted.