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Federal Reserve Bank of Philadelphia
Working Papers
Job matching and propagation
Shigeru Fugita
Garey Ramey
Abstract

In the U.S. labor market, the vacancy-unemployment ratio and employment react sluggishly to productivity shocks. The authors show that the job matching model in its standard form cannot reproduce these patterns due to excessively rapid vacancy responses. Extending the model to incorporate sunk costs for vacancy creation yields highly realistic dynamics. Creation costs induce entrant firms to smooth the adjustment of new openings following a shock, leading the stock of vacancies to react sluggishly.


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Shigeru Fugita & Garey Ramey, Job matching and propagation, Federal Reserve Bank of Philadelphia, Working Papers 06-13, 2006.
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Keywords: Job creation ; Employment ; Unemployment
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