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On-the-job Search and the Cyclical Dynamics of the Labor Market

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  • Krause, M.U.
  • Lubik, T.A.

    (Tilburg University, Center for Economic Research)

Abstract

We develop a dynamic general equilibrium model where workers can engage in search while on the job.We show that on-the-job search is a key component in explaining labor market dynamics in models of equilibrium unemployment.The model predicts fluctuations of unemployment, vacancies, and labor productivity whose relative magnitudes replicate the data.A standard search and matching model suggests much lower volatitilities of these variables.Intuitively, in a boom, rising search activity on the job avoids excessive tightening of the labor market for expanding firms.This keeps wage pressures low, thus further increasing firms' incentives to post new jobs.Labor market tightness as measured by the vacancy-unemployment ratio is as volatile as in the data.The interaction between on-the-job search and job creation also generates a strong internal propagation mechanism.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2004-92.

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Date of creation: 2004
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Handle: RePEc:dgr:kubcen:200492

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Web page: http://center.uvt.nl

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Keywords: labour market; curves; business cycles;

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