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Efficient Search on the Job and the Business Cycle

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  • Guido Menzio

    ()
    (Department of Economics, University of Pennsylvania)

  • Shouyong Shi

    ()
    (Department of Economics, University of Toronto)

Abstract

We build a directed search model of the labor market in which workers’ transitions between unemployment, employment, and across employers are endogenous. We prove the existence, uniqueness and efficiency of a recursive equilibrium with the property that the distribution of workers across employment states does not affect the agents’ values and strategies. Because of this property, we are able to compute the equilibrium outside the non-stochastic steady-state. We use a calibrated version of the model to measure the effect of productivity shocks on the US labor market. We find that productivity shocks generate procyclical fluctuations in the rate at which unemployed workers become employed and countercyclical fluctuations in the rate at which employed workers become unemployed. Moreover, we find that productivity shocks generate large countercyclical fluctuations in the number of vacancies opened for unemployed workers and even larger procyclical fluctuations in the number of vacancies created for employed workers. Overall, productivity shocks alone can account for 80 percent of unemployment volatility, 30 percent of vacancy volatility and for the nearly perfect negative correlation between unemployment and vacancies.

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 08-029.

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Length: 50 pages
Date of creation: 11 Aug 2008
Date of revision:
Handle: RePEc:pen:papers:08-029

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Keywords: Directed Search; On the Job Search; Business Cycles;

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References

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  4. Guido Menzio & Shouyong Shi, 2009. "Block Recursive Equilibria for Stochastic Models of Search on the Job," PIER Working Paper Archive 09-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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  1. Directed labor search and the cycle
    by Economic Logician in Economic Logic on 2008-08-26 15:02:00
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