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.
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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number
tecipa-308.
References listed on IDEAS Please 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.:
Joao Gomes & Jeremy Greenwood & Sergio Rebelo, 1997.
"Equilibrium Unemployment,"
NBER Working Papers
5922, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Joao Gomes & Jeremy Greenwood & Sergio T. Rebelo, 2001.
"Equilibrium Unemployment,"
RCER Working Papers
479, University of Rochester - Center for Economic Research (RCER).
[Downloadable!]
Alain Delacroix & Shouyong Shi, 2006.
"Directed Search On The Job And The Wage Ladder,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 651-699, 05.
[Downloadable!] (restricted)
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