On-the-Job Search and Labor Market Reallocation

Abstract

This paper studies amplification of productivity shocks in labor markets through on-thejob-search. There is incomplete information about the quality of the employee-firm match which provides persistence in employment relationships and the rationale for on-the-job search. Amplification arises because productivity changes not only affect firms' probability of contacting unemployed workers but also of contacting already employed workers. Since higher productivity raises the value of all matches, even low quality matches become productive enough to survive in expansions. Therefore the measure of workers in low quality matches is greater when productivity is high, implying a higher probability of switching to another match. In other words, firms are more likely to meet employed workers in expansions and those they meet are more likely to accept firm's job offer because they are more likely to be employed in a low quality match. This introduces strongly procyclical labor market reallocation through procyclical job-to-job transitions. Simulations with a productivity process that is consistent with average labor productivity in the U.S. show that standard deviations for unemployment, vacancies and market tightness (vacancy-unemployment ratio) match the U.S. data. The model also reconciles the presence of endogenous separation with the negative correlation of unemployment and vacancies over business cycle frequencies (i.e. it is consistent with the Beveridge curve).

Labor-market volatility in a matching model with worker heterogeneity and endogenous separations

“…Her main finding is that in such a model the adjustments in the hiring margin do not contribute to more volatility in job creation. Some other studies, such as Krause and Lubik (2007), Nagypál (2007) and Tasci (2007), also explore the interaction between worker heterogeneity and labor market volatility, but focus on the heterogeneity introduced by on-the-job search. 4 In Pries's model, the shift in the unemployment pool towards low-productivity workers is imposed exogenously by considering a larger increase in the exogenous separation rate for low-productivity workers.…”

Exogenous vs. Endogenous Separation

“…6 Dynamic stochastic equilibria of the MP model with a constant separation rate are evaluated in Merz (1995), Andolfatto (1996), Hall (2005), Nason and Slotsve (2005), Shimer (2005), Yashiv (2006), Fujita and Ramey (2007), Hagedorn and Manovskii (2008) and Shimer (2010); Mortensen and Pissarides (1994), Cooley and Quadrini (1999), Cole andRogerson (1999), Den Haan et al (2000), and Walsh (2005) analyze dynamic stochastic equilibria of specifications with an endogenous separation rate, while OJS is assessed in Mortensen (1994), Pissarides (1994), Krause and Lubik (2006), Nagypál (2005) and Tasci (2006). Recently, Menzio and Shi (2011) analyze unemployment and worker transitions using an OJS model that uses an alternative "directed search" approach.…”

The Cyclical Behavior of Equilibrium Unemployment and Vacancies across OECD Countries

“…Other studies provided alternative mechanisms that have the potential to amplify the effects of business cycles on vacancies and unemployment: Silva and Toledo (2009) introduce post-match labor turnover costs; Pissarides (2009) introduces a fixed component to vacancy posting costs; Krause and Lubik (2006), Nagypál (2006), and Tasci (2007) explore the role of job-to-job transitions; Costain and Reiter (2008) introduce the possibility that technology shocks may be cohort-specific; Petrosky-Nadeau and Wasmer (2013) explore financial frictions, working together with labor market frictions; and finally, the aforementioned HM introduce procyclical vacancy posting costs and change the mapping between the data and the model. 3 Our paper provides a first step in the direction of testing the validity of these channels in a cross-country context.…”