On the Job Search and Business Cycles

We propose a highly tractable way of analyzing business cycles in an environment with random job search both off- and on-the-job (OJS). Heterogeneity in productivity across jobs generates a job ladder. Firms Bertrand-compete for employed workers, as in the Sequential Auctions protocol of Postel-Vinay and Robin [2002]. We identify three channels through which OJS amplifies and propagates aggregate shocks: 1) a higher estimated elasticity of the matching function when allowing for OJS; 2) the differential returns to hiring employed and unemployed job applicants, whose proportions naturally vary over the business cycle; 3) the slow reallocation of workers through OJS across rungs of the job ladder, generating endogenous, slowly evolving opportunities for further poaching, which feed back on job creation incentives. JEL Codes: J64, J31, D86.