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Productivity and job flows: Heterogeneity of new hires and continuing jobs in the business cycle

This paper focuses on productivity dynamics of a firm-worker match as a potential explanation for the ‘unemployment volatility puzzle’. We let new matches and continuing jobs differ in terms of productivity level and sensitivity to aggregate productivity shocks. As a result, new matches have a higher destruction rate and lower, but more volatile, wages than old matches, as new hires receive technology associated with the latest vintage. In our model, an aggregate productivity shock generates a persistent productivity difference between the two types of matches, creating an incentive to open new productive vacancies and to destroy old matches that are temporarily less productive. The model produces a well behaved Beveridge curve, despite endogenous job destruction and more volatile vacancies and unemployment, without needing to rely on differing wage setting mechanisms for new and continuing jobs.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0915netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 15/2009.

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Length: 48 pages
Date of creation: 01 Jul 2009
Date of revision:
Publication status: Published as Kilponen, Juha and Juuso Vanhala, 'Sensitivity of Job Destruction to Vintage and Tenure Effects' in The Scandinavian Journal of Economics, 2014, pages 1068-1090.
Handle: RePEc:hhs:bofrdp:2009_015
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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  1. Arozamena, Leandro & Centeno, Mario, 2006. "Tenure, business cycle and the wage-setting process," European Economic Review, Elsevier, vol. 50(2), pages 401-424, February.
  2. Anabela Carneiro & Paulo Guimaraes & Pedro Portugal, 2009. "Real Wages and the Business Cycle: Accounting for Worker and Firm Heterogeneity," CEF.UP Working Papers 0903, Universidade do Porto, Faculdade de Economia do Porto.
  3. Yashiv, Eran, 2006. "Evaluating the Performance of the Search and Matching Model," IZA Discussion Papers 1931, Institute for the Study of Labor (IZA).
  4. Christian Haefke & Marcus Sonntag & Thijs van Rens, 2006. "Wage Rigidity and Job Creation," 2006 Meeting Papers 773, Society for Economic Dynamics.
  5. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  6. Caballero, R.J. & Hammour, M.L., 1997. "Jobless Growth: Appropriability, Factor-Substitution, and Unemployment," Working papers 97-18, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Thomas Lubik & Michael Krause, 2003. "The (Ir)relevance of Real Wage Rigidity in the New Keynesian Model with Search Frictions," Economics Working Paper Archive 504, The Johns Hopkins University,Department of Economics.
  8. Robert H. Topel, 1990. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," NBER Working Papers 3294, National Bureau of Economic Research, Inc.
  9. Carl E. Walsh, 2005. "Labor Market Search, Sticky Prices, and Interest Rate Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(4), pages 829-849, October.
  10. James S. Costain & Michael Reiter, 2003. "Business cycles, unemployment insurance and the calibration of matching models," Economics Working Papers 872, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2006.
  11. 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.
  12. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  13. Garey Ramey & Wouter J. den Haan & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, vol. 90(3), pages 482-498, June.
  14. Carlos Thomas, 2007. "Search frictions, real rigidities and inflation dynamics," LSE Research Online Documents on Economics 19692, London School of Economics and Political Science, LSE Library.
  15. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
  16. Keith Kuester & Goethe University, 2006. "Real Price and Wage Rigidities in a Model with Matching Frictions," Computing in Economics and Finance 2006 152, Society for Computational Economics.
  17. Yashiv, E., 1999. "The Determinants of Equilibrium Unemployment," Papers 36-99, Tel Aviv.
  18. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  19. Farmer, Roger E A, 2005. "Shooting the Auctioneer," CEPR Discussion Papers 4825, C.E.P.R. Discussion Papers.
  20. Jeffrey R. Campbell & Jonas D.M. Fisher, 1998. "Organizational flexibility and employment dynamics at young and old plants," Working Paper Series WP-98-24, Federal Reserve Bank of Chicago.
  21. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "The Growth and Failure of U.S. Manufacturing Plants," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 671-98, November.
  22. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2005. "Unemployment and vacancy fluctuations in the matching model: inspecting the mechanism," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 19-50.
  23. Antonella Trigari, 2009. "Equilibrium Unemployment, Job Flows, and Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 1-33, 02.
  24. Lopez-Salido, Jose David & Michelacci, Claudio, 2004. "Technology Shocks and Job Flows," CEPR Discussion Papers 4426, C.E.P.R. Discussion Papers.
  25. Campbell, J.R., 1995. "Entry, Exit, Technology, and Business Cycles," RCER Working Papers 407, University of Rochester - Center for Economic Research (RCER).
  26. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  27. repec:cup:cbooks:9780521465618 is not listed on IDEAS
  28. Gary Solon & Ryan Michaels & Michael W. L. Elsby, 2009. "The Ins and Outs of Cyclical Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 84-110, January.
  29. Mark Gertler & Antonella Trigari, 2006. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Computing in Economics and Finance 2006 525, Society for Computational Economics.
  30. Yashiv, E., 1999. "Hiring as Investment Behavior," Papers 35-99, Tel Aviv.
  31. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  32. Brown, James N, 1989. "Why Do Wages Increase with Tenure? On-the-Job Training and Life-Cycle Wage Growth Observed within Firms," American Economic Review, American Economic Association, vol. 79(5), pages 971-91, December.
  33. Lucia Foster & John Haltiwanger & C. J. Krizan, 2006. "Market Selection, Reallocation, and Restructuring in the U.S. Retail Trade Sector in the 1990s," The Review of Economics and Statistics, MIT Press, vol. 88(4), pages 748-758, November.
  34. 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.
  35. repec:cup:cbooks:9780521633574 is not listed on IDEAS
  36. Michael Reiter, 2006. "Embodied technical change and the fluctuations of wages and unemployment," Economics Working Papers 980, Department of Economics and Business, Universitat Pompeu Fabra.
  37. 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.
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