Abstract
AbstractAlthough new Keynesian models with labor market frictions report an increase in unemployment and a decrease in labor market tightness in response to a positive technology shock, which appears to be in line with recent empirical findings, the volatilities of these variables are not as high as their empirical counterparts. This calls for the introduction of new modeling tools to amplify the volatilities of the unemployment rate and labor market tightness. Along this line, this paper contributes to the theoretical literature by studying the effect of employment‐to‐employment flow in a new Keynesian model with labor market frictions. We consider two types of firms that offer different wage levels, which incentivize low‐paid agents to search on the job. Differently from the existing literature, the main source of wage dispersion is the difference between firms' bargaining powers. The proposed model generates a higher volatility of unemployment and labor market tightness in response to a positive technology shock compared to the model without on‐the‐job search, without causing a significant change in the responses of other variables.
Highlights
We study a New Keynesian (NK) model in this paper formulating an extension to the model of Galı (2010) by introducing on-the-job search
The aim of this paper is to examine the effect of on-the-job search on labor market dynamics, especially on unemployment and labor market tightness
When we set the level of on-the-job search intensity to 0%, the level deviation of the unemployment rate is 0.0026 in the first period, and when we set its level to 10%, the same response increases to 0.0045
Summary
The aim of this paper is to examine the effect of on-the-job search on labor market dynamics, especially on unemployment and labor market tightness
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