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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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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
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  1. Lopez-Salido, Jose David & Michelacci, Claudio, 2004. "Technology Shocks and Job Flows," CEPR Discussion Papers 4426, C.E.P.R. Discussion Papers.
  2. Caballero, Ricardo J. & Hammour, Mohamad L., 1998. "Jobless growth: appropriability, factor substitution, and unemployment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 51-94, June.
  3. 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.
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  9. 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.
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  23. 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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  31. 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.
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  35. Arozamena, Leandro & Centeno, Mario, 2006. "Tenure, business cycle and the wage-setting process," European Economic Review, Elsevier, vol. 50(2), pages 401-424, February.
  36. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  37. 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.
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