On-the-Job Search and Business Cycle Dynamics
Recent research shows that observed labor market flows can be explained in search and matching models only by assuming either implausibly large productivity shocks (Hall 2003) or an excessively high degree of real wage rigidity even for new hires (Shimer 2003). If this is not the case, the incentive to create new jobs in a boom is weakened since workers share the returns with employers. Fewer vacancies are opened, and unemployment falls by less than is evident from the data. However, this argument relies on treating the vacancy-unemployment ratio as the relevant measure of labor market tightness, which, in turn, is a central determinant of wages in the Nash bargaining approach. We argue in this paper that on-the-job search by workers expands the pool of searchers that firms can recruit from. Since job-to-job movements are highly procyclical, so is the number of on-the-job searchers. The bargaining power of incumbent workers and new hires therefore rises by much less in a boom than would be suggested by the standard vacancy-unemployment ratio alone. Instead, the ratio of vacancies to unemployed and employed searchers is the correct measure of labor market tightness. We quantitatively assess the role of on-the-job search in a fully specified, real DSGE model with endogenous labor market flows. There are two types of jobs, good and bad, which differ by creation cost and productivity. Vacant good jobs can be filled with employed and unemployed job seekers, while bad jobs only recruit from the unemployed. We consider alternative assumptions for the bargaining process, which is complicated by the fact that employed searchers have a fallback option that differs from the value of unemployment. The critical issue here is how firms bargain with employed workers, and what fraction of the rents from a new job workers can extract. We show that on-the-job search greatly reduces the volatility of true labor market tightness, compared to a benchmark model without job search. Therefore, wages are also much less volatile. At the same time, the predicted variation of the vacancy-unemployment ratio is much higher, and thus closer to the data. We are thus able to replicate the observed labor market dynamics in a full general equilibrium context. We also extend our real framework by including money and a nominal rigidity. In monetary business cycle models with sticky prices, real labor costs enter the price setting of firms. Hence, the cyclicality of real wages as determined by bargaining between workers and firms has implications for inflation dynamics. The less cyclical real wages are, the lower we can expect inflation volatility to be. We show that on-the-job search plays a crucial role in dampening fluctuations in real wages, thereby helping to resolve the challenges to the search and matching framework of labor market dynamics posed by Shimer (2003).
|Date of creation:||11 Aug 2004|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
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.:
- Wouter J. den Haan & Garey Ramey & Joel Watson, 1997.
"Job Destruction and Propagation of Shocks,"
NBER Working Papers
6275, National Bureau of Economic Research, Inc.
- Wouter Denhaan & Garey Ramey & Joel Watson, 1997. "FORTRAN code for Job Destruction and Propagation of Shocks," QM&RBC Codes 61, Quantitative Macroeconomics & Real Business Cycles.
- Mortensen, Dale T., 1994. "The cyclical behavior of job and worker flows," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1121-1142, November.
- Barbara Petrongolo & Christopher A. Pissarides, 2000.
"Looking Into the Black Box: A Survey of the Matching Function,"
CEP Discussion Papers
dp0470, Centre for Economic Performance, LSE.
- Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
- Barbara Petrongolo & Christopher Pissarides, 2000. "Looking into the black box: a survey of the matching function," LSE Research Online Documents on Economics 2122, London School of Economics and Political Science, LSE Library.
- Petrongolo, Barbara & Pissarides, Christopher, 2000. "Looking Into The Black Box: A Survey Of The Matching Function," CEPR Discussion Papers 2409, C.E.P.R. Discussion Papers.
- Robert E. Hall, 2003. "Modern Theory of Unemployment Fluctuations: Empirics and Policy Applications," American Economic Review, American Economic Association, vol. 93(2), pages 145-150, May.
- Christopher A. Pissarides, 1994. "Search Unemployment with On-the-job Search," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 457-475.
- Ricardo J. Caballero & Mohamad L. Hammour, 1996.
"On the Timing and Efficiency of Creative Destruction,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 111(3), pages 805-852.
- Ricardo J. Caballero & Mohamad L. Hammour, 1994. "On the Timing and Efficiency of Creative Destruction," NBER Working Papers 4768, National Bureau of Economic Research, Inc.
- Arthur M. Okun, 1973. "Upward Mobility in a High-Pressure Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 207-262.
- Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
- Contini, Bruno & Revelli, Riccardo, 1997. "Gross flows vs. net flows in the labor market: What is there to be learned?," Labour Economics, Elsevier, vol. 4(3), pages 245-263, September.
- Mortensen, Dale T. & Pissarides, Christopher A., 1999.
"Job reallocation, employment fluctuations and unemployment,"
Handbook of Macroeconomics,
in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228
- Dale T. Mortensen & Christopher A. Pissarides, 1999. "Job Reallocation, Employment Fluctuations and Unemployment," CEP Discussion Papers dp0421, Centre for Economic Performance, LSE.
- Harold L. Cole & Richard Rogerson, 1996.
"Can the Mortonson-Pissarides matching model match the business cycle facts?,"
224, Federal Reserve Bank of Minneapolis.
- Cole, Harold L & Rogerson, Richard, 1999. "Can the Mortensen-Pissarides Matching Model Match the Business-Cycle Facts?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 933-59, November.
- Dale T. Mortensen & Christopher A. Pissarides, 1994.
"Job Creation and Job Destruction in the Theory of Unemployment,"
Review of Economic Studies,
Oxford University Press, vol. 61(3), pages 397-415.
- Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 19 pages.
- Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
- Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
- Sims, Christopher A, 2002.
"Solving Linear Rational Expectations Models,"
Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
- Christopher Sims, 2001. "Matlab Code for Solving Linear Rational Expectations Models," QM&RBC Codes 11, Quantitative Macroeconomics & Real Business Cycles.
- Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 165-193, October.
- Robert Shimer, 2004.
"The Consequences of Rigid Wages in Search Models,"
Journal of the European Economic Association,
MIT Press, vol. 2(2-3), pages 469-479, 04/05.
- Bruce C. Fallick & Charles A. Fleischman, 2004. "Employer-to-employer flows in the U.S. labor market: the complete picture of gross worker flows," Finance and Economics Discussion Series 2004-34, Board of Governors of the Federal Reserve System (U.S.).
- Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, June.
- 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(2), pages 495-594.
- Burgess, Simon M, 1993. "A Model of Competition between Unemployed and Employed Job Searchers: An Application to the Unemployment Outflow Rate in Britain," Economic Journal, Royal Economic Society, vol. 103(420), pages 1190-204, September.
- Acemoglu, Daron, 2001. "Good Jobs versus Bad Jobs," Journal of Labor Economics, University of Chicago Press, vol. 19(1), pages 1-21, January.
- Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
When requesting a correction, please mention this item's handle: RePEc:ecm:nasm04:489. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.