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On-the-Job Search and the Cyclical Dynamics of the Labor Market

  • Thomas Lubik
  • Michael Krause

We develop a dynamic general equilibrium model where workers can engage in search while on the job. We show that on-the-job search is a key component in explaining labor market dynamics in models of equilibrium unemployment. The model predicts fluctuations of unemployment, vacancies, and labor productivity whose relative magnitudes replicate the data. A standard search and matching model suggests much lower volatitilities of these variables. Intuitively, in a boom, rising search activity on the job avoids excessive tightening of the labor market for expanding firms. This keeps wage pressures low, thus further increasing firms?incentives to post new jobs. Labor market tightness as measured by the vacancy-unemployment ratio is as volatile as in the data. The interaction between on-the-job search and job creation also generates a strong internal propagation mechanism.

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Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 513.

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Date of creation: Sep 2004
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Handle: RePEc:jhu:papers:513
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  7. 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.
  8. Julio J. Rotemberg, 2008. "Cyclical Wages in a Search-and-Bargaining Model with Large Firms," NBER Chapters, in: NBER International Seminar on Macroeconomics 2006, pages 65-114 National Bureau of Economic Research, Inc.
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  23. Shimer, Robert, 2006. "On-the-job search and strategic bargaining," European Economic Review, Elsevier, vol. 50(4), pages 811-830, May.
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