On-the-job Search and Cyclical Unemployment: Crowding Out vs. Vacancy Effects

We incorporate on-the-job search (OTJS) into a real business cycle model in order to study whether OTJS increases the cyclical volatility of unemployment and vacancies. The increased search of employed workers during expansions has two effects on the unemployed: it induces firms to openmore vacancies, but employedworkers also crowd out unemployed workers in the job search. The overall effect of OTJS on unemployment volatility is thus ambiguous. We showanalytically and numerically that the difference between the (employer?s share of the) surplus ofmatchwith a previously employed versus a previously unemployed job seeker determines the degree to which OTJS increases unemployment volatility. We use this result to re-consider some related papers of OTJS and explain the amplification of volatility they obtain.