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Efficient Search On The Job And The Business Cycle, Second Version

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Executive Summary

The authors build a directed search model of the labor market in which workers' transitions between unemployment, employment, and across employers are endogenous. They prove the existence, uniqueness and efficiency of recursive equilibrium with the property that the distribution of workers across employment states affects neither the agents' values and strategies nor the market tightness. Because of this property, they are able to compute the equilibrium outside the non-stochastic steady-state. They use a calibrated version of the model to measure the effect of productivity shocks on the US labor market. They find that productivity shocks generate procyclical fluctuations in the rate at which unemployed workers become employed and countercyclical fluctuations in the rate at which employed workers become unemployed.

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