Matching theory has been especially influential in labor economics, where it has been used to describe the formation of new jobs, as well as to describe other human relationships like marriage. Matching theory is closely related to an earlier framework called search theory which is somewhat more commonly applied in microeconomics.
One of the founders of matching theory is Dale T. Mortensen of Northwestern University. A textbook treatment of the matching approach to labor markets is Christopher A. Pissarides' book Equilibrium Unemployment Theory.
where , , and are positive constants. In this equation, represents the number of unemployed job seekers in the economy at a given time , and is the number of vacant jobs firms are trying to fill. The number of new relationships (matches) created (per unit of time) is given by .
A matching function is in general analogous to a production function. But whereas a production function usually represents the production of goods and services from inputs like labor and capital, a matching function represents the formation of new relationships from the pools of available unmatched individuals. Estimates of the matching function suggest that it has constant returns to scale, that is, .
If the fraction of jobs that separate (due to firing, quits, and so forth) from one period to the next is , then to calculate the change in employment from one period to the next we must add the formation of new matches and subtract off the separation of old matches. A period may be treated as a week, a month, a quarter, or some other convenient period of time, depending on the data under consideration. (For simplicity, we are ignoring the entry of new workers into the labor force, and death or retirement of old workers, but these issues can be accounted for as well.) Suppose we write the number of workers employed in period as , where is the labor force in period . Then given the matching function described above, the dynamics of employment over time would be given by
For simplicity, many studies treat as a fixed constant. But the fraction of workers separating per period of time can be determined endogenously if we assume that the value of being matched varies over time for each worker-firm pair (due, for example, to changes in productivity).