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On-the-job Search and Business Cycle Dynamics

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Author Info
Thomas A. Lubik
Michael U. Krause

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Abstract

We quantitatively assess the role of on-the-job search for labor market dynamics in a fully specified, real DSGE model with endogenous job creation and destruction. The model features heterogeneity of the productivity of firms, across which workers search, as well as heterogeneity of jobs within firms. On-the-job search promises to resolve the difficulty of the standard search and matching model in explaining the joint behavior of vacancies, unemployment and labor productivity (see Hall, 2003 and Shimer, 2003). We show that including on-the-job search implies a low volatility of the ratio of vacancies to searchers (employed and unemployed), which reduces the volatility of real wages. At the same time, the vacancy-unemployment ratio is highly volatile, thus matching the data more closely than in the standard model. The reason is that on-the-job search by workers expands the pool of searchers that firms can recruit from, thus reducing cyclical changes in the bargaining power of incumbent workers and new hires. We extend the framework by including money and nominal rigidities. In monetary business cycle models with sticky prices, real labor costs enter the price setting of firms. Hence, the reduced cyclicality of real wages with on-the-job search as determined by bargaining between workers and firms has implications for the transmission of monetary shocks. The less cyclical real wages are, the lower we can expect inflation volatility to be.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 307.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:307

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Keywords: DSGE; labor market dynamics; heterogeneity; Beveridge curve; bargaining;

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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  18. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March. [Downloadable!] (restricted)
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  21. George A. Akerlof & Andrew K. Rose & Janet L. Yellen, 1988. "Job Switching and Job Satisfaction in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1988-2), pages 495-594. [Downloadable!]
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