Labor-Market Fluctuations and On-The-Job Search (WP-08-05)
Éva Nagypál
This paper argues that a model of the aggregate labor market that incorporates the observed extent of job-to-job transitions can explain all the cyclical volatility in vacancy and unemployment rates in U.S. data in response to shocks of the observed magnitude. The key to this result is the complementarity between on-the-job search and costly hiring that leads employers to expect a higher payoff from recruiting employed searchers. This higher expected payoff explains why firms recruit more when the number of employed searchers is high during periods of low unemployment.