Income Effects and the Cyclicality of Job Search Effort

The canonical matching model predicts procyclical job search effort while the evidence suggests otherwise. In this paper, we assess whether introducing income effects into a model with matching frictions leads to acyclical or countercyclical job search effort as in data. We find that income effects improve the cyclical behavior of job search effort because they make the value of leisure procyclical. But the procyclicality of the value of leisure also magnifies the procyclicality of the wage. Unless we make unsound assumptions to mute this effect on the wage, the model generates either acyclical or procyclical unemployment. Thus, our paper casts doubt on the role of income effects in generating cyclical patterns of job search effort consistent with the data.