On-the-Job Search and Short-Term Employment

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This project explores the importance of two related assumptions in the standard macroeconomic theory of the labor market: the equilibrium search and matching model. The first assumption is that workers can only search for jobs when they are unemployed. The Principal Investigator will follow the lead of some other researchers and explore the implications of allowing for "on-the-job" search. The second assumption is that firms can only hire workers when they have a job vacancy. The PI will explore the implications of allowing for "short-term employment" a situation in which a firm hires a worker knowing that it will try to find a better one in the near future. This possibility has not previously been examined.Preliminary research indicates that on-the-job search and short-term employment may qualitatively affect the behavior of the labor market. For example, in the standard equilibrium search model, all increase in the labor force growth rate (e.g. due to the baby boom) or an increase in the job separation rate (e.g. due to business cycle fluctuations) causes an increase in the unemployment rate. In a model with both on-the-job search and short-term employment, the effects may be reversed. More generally, it appears that any activity that increases the flow of workers between employment and unemployment has the potential of reducing the unemployment rate.The first objective of this project is to explore the sensitivity of this result to the model specification. In the course of this project, the PI will endogenize wage determination and search behavior and will introduce heterogeneous workers and jobs into the basic model. He will then examine the properties of the resulting economy.The second objective of this project is to explore the macroeconomic implications of the theory of on-the-job search and short-term employment. The theory will shed light on the large flow of workers between jobs. It also predicts that the probability of a worker losing her job should get smaller as the worker stays in the job for longer, which is consistent with the available evidence. The PI will explore the implications of this for the persistence of individual unemployment spells and of aggregate unemployment. The PI will also examine whether labor market rigidities such as hiring costs may he responsible for high levels of unemployment in Europe. This possibility is suggested by the basic result that a large flow of workers between employment and unemployment is important for maintaining a low unemployment rateThe last objective of this project is to test the theory using a variety of empirical evidence. For example the PI will use fluctuations in birth rates 16-24 years earlier to identify anticipated changes in the growth rate of the labor force. The theory of on-the-job search and short-term employment makes strong predictions concerning the impact of these fluctuations on unemployment rates, wages, labor force participation, and the flow of workers between jobs. Thus empirical evidence will ultimately refine or reject this theory.