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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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