On-the-Job Search and Business Cycles

Guido Menzio and Shouyong Shi

Working Papers from University of Toronto, Department of Economics

Abstract: 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.

Keywords: Directed Search; On the Job Search; Unemployment Fluctuations (search for similar items in EconPapers)
JEL-codes: E24 E32 J64 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2008-01-21
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.economics.utoronto.ca/public/workingPapers/tecipa-308.pdf Main Text (application/pdf)

Related works:
Working Paper: On-the-Job Search and Business Cycles (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tor:tecipa:tecipa-308

Access Statistics for this paper

More papers in Working Papers from University of Toronto, Department of Economics 150 St. George Street, Toronto, Ontario.
Bibliographic data for series maintained by RePEc Maintainer ().