Working Papers

June 2010, No. 10-12

On the Job Search and the Cyclical Dynamics of the Labor Market

Michael U. Krause and Thomas A. Lubik

We develop a business cycle model with search and matching frictions in the labor market and show that on-the-job search generates substantial amplification and propagation. Rising search by employed workers in an expansion amplifies the incentives of firms to post vacancies. By keeping job creation costs low for firms, on-the-job search amplifies exogenous shocks. In our calibration, this allows the model to generate fluctuations of unemployment, vacancies, and job-to-job transitions whose magnitudes are close to the data, and leads output to be highly autocorrelated. On-the-job search implies higher-order serial correlation that is absent from the standard search and matching model.

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