On-the-Job Search and Business Cycles
Abstract
In this paper, we develop a tractable model of the labor market where workers search for jobs both while unemployed and while on the job. Search is directed in the sense that each worker chooses to search for the offer that provides the optimal tradeoff between the probability of obtaining the offer and the increase in the value relative to the worker's current employment. There are both aggregate and match-specific shocks, on which the wage path in an offer can be contingent. We characterize the equilibrium analytically and show that the equilibrium is unique and socially efficient. On the quantitative side, we calibrate the model to the US data to measure the effect of aggregate productivity fluctuations on the labor market. We find that productivity fluctuations account for approximately 64% of the cyclical volatility in US unemployment. Moreover, productivity fluctuations generate the same matrix of correlations between unemployment and other labor market variables as in the US. In particular, the Beveridge curve is negatively sloped over business cycles, and the magnitude of the slope is the same as in the data. In light of these findings, we conclude that productivity shocks are one of the main forces driving labor market fluctuations over business cycles. Furthermore, we find that recessions have a cleansing effect on the economy.Download Info
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-308.Length: 36 pages
Date of creation: 21 Jan 2008
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-308
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Related research
Keywords: Directed Search; On the Job Search; Unemployment Fluctuations;Other versions of this item:
- Shouyong Shi & Guido Menzio, 2008. "On-the-Job Search and Business Cycles," 2008 Meeting Papers 252, Society for Economic Dynamics.
- 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
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-02 (All new papers)
- NEP-DGE-2008-02-02 (Dynamic General Equilibrium)
- NEP-LAB-2008-02-02 (Labour Economics)
- NEP-MAC-2008-02-02 (Macroeconomics)
References
References listed on IDEASPlease report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Leena Rudanko, 2008.
"Aggregate and Idiosyncratic Risk in a Frictional Labor Market,"
Boston University - Department of Economics - Working Papers Series
wp2008-009, Boston University - Department of Economics.
- Leena Rudanko, 2011. "Aggregate and Idiosyncratic Risk in a Frictional Labor Market," American Economic Review, American Economic Association, vol. 101(6), pages 2823-43, October.
- Leena Rudanko, 2009. "Aggregate and Idiosyncratic Risk in a Frictional Labor Market," 2009 Meeting Papers 468, Society for Economic Dynamics.
- Leena Rudanko, 2010. "Aggregate and Idiosyncratic Risk in a Frictional Labor Market," Boston University - Department of Economics - Working Papers Series WP2010-054, Boston University - Department of Economics.
- John Kennes & Daniel le Maire, 2010. "Coordination Frictions and Job Heterogeneity: A Discrete Time Analysis," Economics Working Papers 2010-05, School of Economics and Management, University of Aarhus.
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