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On-the-Job Search and Business Cycles

  • Guido Menzio
  • Shouyong Shi

In this paper, we develop a tractable model of the labor market where workers search for jobs both while unemployed and while on the job. Search is directed in the sense that each worker chooses to search for the offer that provides the optimal tradeoff between the probability of obtaining the offer and the increase in the value relative to the worker's current employment. There are both aggregate and match-specific shocks, on which the wage path in an offer can be contingent. We characterize the equilibrium analytically and show that the equilibrium is unique and socially efficient. On the quantitative side, we calibrate the model to the US data to measure the effect of aggregate productivity fluctuations on the labor market. We find that productivity fluctuations account for approximately 64% of the cyclical volatility in US unemployment. Moreover, productivity fluctuations generate the same matrix of correlations between unemployment and other labor market variables as in the US. In particular, the Beveridge curve is negatively sloped over business cycles, and the magnitude of the slope is the same as in the data. In light of these findings, we conclude that productivity shocks are one of the main forces driving labor market fluctuations over business cycles. Furthermore, we find that recessions have a cleansing effect on the economy.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-308.

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Length: 36 pages
Date of creation: 21 Jan 2008
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-308
Contact details of provider: Postal: 150 St. George Street, Toronto, Ontario
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  1. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-90, September.
  2. Mortensen, Dale T. & Nagypál, Éva, 2005. "More on Unemployment and Vacancy Fluctuations," IZA Discussion Papers 1765, Institute for the Study of Labor (IZA).
  3. Margaret Stevens, 2000. "Wage-Tenure Contracts in a Frictional Labour Market: Firms Strategies for Recruitment and Retention," Economics Series Working Papers 2000-W10, University of Oxford, Department of Economics.
  4. Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
  5. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
  6. Mortensen, Dale T., 1994. "The cyclical behavior of job and worker flows," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1121-1142, November.
  7. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  8. Bruce Fallick & Charles A. Fleischman, 2004. "Employer-to-employer flows in the U.S. labor market: the complete picture of gross worker flows," Finance and Economics Discussion Series 2004-34, Board of Governors of the Federal Reserve System (U.S.).
  9. Joao Gomes & Jeremy Greenwood & Sergio T. Rebelo, 2001. "Equilibrium Unemployment," RCER Working Papers 479, University of Rochester - Center for Economic Research (RCER).
  10. Gadi Barlevy, 2002. "The Sullying Effect of Recessions," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 65-96.
  11. Pissarides, Christopher A, 1994. "Search Unemployment with On-the-Job Search," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 457-75, July.
  12. Alain Delacroix & Shouyong Shi, 2006. "Directed Search On The Job And The Wage Ladder," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 651-699, 05.
  13. Ken Burdett & Melvyn Coles, 2003. "Equilibrium Wage-Tenure Contracts," Econometrica, Econometric Society, vol. 71(5), pages 1377-1404, 09.
  14. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  15. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
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