We build a directed search model of the labor market in which workers' transitions between unemployment, employment, and across employers are endogenous. We prove the existence, uniqueness and efficiency of a 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, we are able to compute the equilibrium outside the non-stochastic steady-state. We use a calibrated version of the model to measure the effect of productivity shocks on the US labor market. We 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. Moreover, we find that productivity shocks generate large countercyclical fluctuations in the number of vacancies opened for unemployed workers and even larger procyclical fluctuations in the number of vacancies created for employed workers. Overall, productivity shocks alone can account for 80 percent of unemployment volatility, 30 percent of vacancy volatility and for the nearly perfect negative correlation between unemployment and vacancies.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
14905.
Length: Date of creation: Apr 2009 Date of revision: Handle: RePEc:nbr:nberwo:14905
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Find related papers by JEL classification: E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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Alain Delacroix & Shouyong Shi, 2006.
"Directed Search On The Job And The Wage Ladder,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(2), pages 651-699, 05.
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Guido Menzio & Espen Moen, 2008.
"Worker Replacement,"
PIER Working Paper Archive
08-040, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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Carlos Carrillo-Tudela & Guido Menzio & Eric Smith, 2009.
"Job Search with Bidder Memories,"
PIER Working Paper Archive
09-027, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
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