Working Paper

On-the-job search and labor market reallocation

Abstract: This paper studies amplification of productivity shocks in labor markets through on-the-job-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 a 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.

Keywords: Job hunting; Labor market; Business cycles;

https://doi.org/10.26509/frbc-wp-200725

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2007

Number: 0725