Efficient Search on the Job and the Business Cycle

Guido Menzio, Shouyong Shi

NBER Working Paper No. 14905
Issued in April 2009
NBER Program(s):Economic Fluctuations and Growth

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.

download in pdf format
   (441 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14905

Published: Guido Menzio & Shouyong Shi, 2011. "Efficient Search on the Job and the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 468 - 510. citation courtesy of

Users who downloaded this paper also downloaded* these:
Menzio and Shi w14907 Block Recursive Equilibria for Stochastic Models of Search on the Job
Menzio, Telyukova, and Visschers w17746 Directed Search over the Life Cycle
Mendoza w22868 Macroprudential Policy: Promise and Challenges
DellaVigna and Paserman w10837 Job Search and Impatience
Elsby, Michaels, and Solon w12853 The Ins and Outs of Cyclical Unemployment
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us