Destabilizing Search Technology

Tristan Potter

No 2023-2, School of Economics Working Paper Series from LeBow College of Business, Drexel University

Abstract: Modern search technologies enable workers to monitor - and thus quickly apply to - newly posted jobs. I conceptualize search as a monitoring decision and study the implications for labor market dynamics. The central insight is that monitoring leads to a novel source of strategic complementarities in search decisions, which results in multiple equilibria that can exert a destabilizing force on the labor market. Strategic complementarities arise because workers who actively monitor new job postings are able to apply before those who do not. This leads to a rat race for jobs in which the belief that others are monitoring new postings necessitates doing the same in order to avoid falling to the back of the queue. I show that this mechanism leads to multiple equilibria in a stylized monitoring game and then embed the game in a quantitative macroeconomic model of the labor market. With a plausibly elastic job creation process (i.e., away from the free-entry limit), multiplicity arises in the quantitative model. The model provides (i) a theory of belief-driven fluctuations in labor supply that can permanently alter the path of the economy, (ii) a mechanism through which transitory demand shocks can permanently affect labor supply, and (iii) an account of the recovery from the Great Recession, during which a historically tight labor market coexisted with weak wage growth---observations difficult to reconcile with traditional models. I document two facts that are supportive of the model and its implications.

Keywords: Search and matching; online job search; hysteresis (search for similar items in EconPapers)
JEL-codes: E24 E71 J64 O33 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2023-01-05
New Economics Papers: this item is included in nep-dge and nep-lab
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Journal Article: Destabilizing search technology (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:drxlwp:2023_002

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