Creative Destruction with On-the-Job Search

Jean-Baptiste Michau

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper is about the labour market consequences of creative destruction with on-the-jobsearch. We consider a matching model in an economy with embodied technological progressand show that its dynamics are profoundly affected by allowing on-the-job search. We obtainthat the elasticity of unemployment with respect to growth shrinks from 1.63 to 0.13.Moreover, the underlying transmission channels change as the flow of obsolete jobspractically disappears and is replaced by a flow of job-to-job transitions. These effects persisteven if employed job seekers are significantly less efficient in the search process than theunemployed. Thus, we show that, rather than contributing to unemployment, creativedestruction induces a direct reallocation of workers from low to high productivity jobs. Theseresults could be strengthened by assuming that search efforts are unobservable by firmswhich induces more on-the-job search. However, the action of worker is no longer surplusmaximizing and, hence, the worker's welfare is increasing in the cost of search which acts asa commitment device. Finally, we show that the model could be extended by allowing forvariable search intensity.

Keywords: commitment device; creative destruction; job flows; obsolescence; on-the-jobsearch; search equilibrium; unemployment (search for similar items in EconPapers)
JEL-codes: E24 J41 J63 J64 O39 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
Date: Written 2007-11
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