Firm Dynamics and Random Search over the Business Cycle

I build a tractable random search model with firm dynamics, on-the-job search, and aggregate shocks. Multi-worker firms make recruitment decisions, choose whether to enter or exit the market, and design wage contracts. Tractability is obtained by showing that, under a set of assumptions on the recruitment technology, the decisions of workers and firms depend on the firms’ current productivity. I confront the model to salient business cycle moments on the reallocation of workers across the firm productivity distribution derived from firm-level data that the model successfully replicates. I use this framework to quantify the drivers of worker reallocation over the post-war business cycle in Britain.