Standard Search Model Research Articles

Job search intensity and wage rigidity in business cycles

Search intensity, as well as the aggregate economic condition, is a crucial factor that determines unemployed workers’ success in job searches. Their search intensity is predicted to be procyclical in standard search and matching models. However, many empirical studies show that search intensity is countercyclical. This study examines the job search behavior of unemployed workers over business cycles using a search and matching model that incorporates wage rigidity and a generalized matching function. Unlike previous studies, the proposed model can generate both procyclical and countercyclical search intensities by introducing wage rigidity. This study calibrates the model to the U.S. economy and provides various impulse response analyses. The numerical exercises show that the model successfully and simultaneously reproduces countercyclical search efforts and sizable labor market fluctuations.

The paradox of search intensity

In standard labor search and matching models, the search intensity (SI) of unemployed workers is procyclical and complements job creation. Both predictions are at odds with the US labor market following the Great Recession. To address these inconsistencies, this paper extends the standard model to incorporate multi-market simultaneous search (MMSS). Adverse aggregate shocks can raise SI as workers simultaneously search in more markets because the incentives are decreasing in the local job-finding rate. This broader search effort leads to higher offer rejection, which in turn discourages firm entry. The offer-rejection externality can result in multiple equilibria. In the calibrated model, a temporary financial crisis can cause a persistent increase in both SI and unemployment.

Public wages, public employment, and business cycle volatility: Evidence from U.S. metro areas

We revisit the question about whether a larger public sector stabilizes or destabilizes the economy. Based on results from two causal identification approaches, we show that a higher rate of public-sector employment reduces volatility in, i.e. stabilizes, private-sector employment growth, with at most a slight crowding-out of private employment. Public wages, meanwhile, increase private wages but appear not to be destabilizing. The stabilizing effect of public employment with limited crowding out is at odds with standard search and matching models that contain a public sector, which predict 1:1 crowding out and strong destabilization. To improve the performance of such models, we follow Gomes (2015) and add a product market that can replicate what Gomes calls the Business Cycle Wealth Effect. We also point out that the government procures output directly from the private sector. When the model has these two features, then it can generate stabilizing effects of public employment on private employment, with reduced crowding out.

Online Advertising as Passive Search

Standard search models assume that consumers actively decide on the order, identity, and number of products they search. We document that online, a large fraction of searches happen in a more passive manner, with consumers merely reacting to online advertisements that do not allow them to choose the timing or the identity of products to which they will be exposed. Using a clickstream panel data set capturing full URL addresses of websites that consumers visit, we show how to detect whether a click is ad initiated. We then report that in the apparel category, ad-initiated clicks account for more than half of all website arrivals, are more concentrated early on in the consumer search process, and lead to less in-depth searches and fewer transactions, consistent with the passive nature of these searches. To account for these systematic differences between active and passive searches, we propose and estimate a simple model that accommodates both types of searches. Our results show that incorrectly treating all searches as active inflates the estimated value of brands that advertise frequently. Our model can more accurately recover data patterns, especially for advertising brands. We finish with model extensions and a discussion of the managerial implications. This paper was accepted by Dmitry Kuksov, marketing. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.02154 .

Network effect and international currency

AbstractThe network effect is an important factor for the inertia and path dependence in the international monetary system. In this paper, we explore its influence, both theoretically and empirically: (a) by extending the standard monetary search model to a three‐country three‐currency model with multiple transitions to clarify the network effect on currency choices; (b) by showing empirically that the network effect is positive, statistically significant, and quantitatively comparable with other factors, such as trade share. The empirical results hold both for major international currencies and emerging currencies, such as RMB, and for various estimation specifications and subsamples.

A Congestion Theory of Unemployment Fluctuations

We propose a theory of unemployment fluctuations in which new hires and incumbent workers are imperfect substitutes. Hence, attempts to hire away the unemployed during recessions diminish the marginal product of new hires, discouraging job creation. This single feature achieves a tenfold increase in the volatility of hiring in an otherwise standard search model, produces a realistic Beveridge curve despite countercyclical separations, and explains 30–40 percent of US unemployment fluctuations. Additionally, it explains the excess procyclicality of new hires’ wages, the cyclical labor wedge, countercyclical earnings losses from job displacement, and the limited steady-state effects of unemployment insurance. (JEL E24, E32, J22, J23, J31, J63)

Wage and employment cyclicalities at the establishment level

Although the quantitative relationship between employment cyclicality and wage cyclicality is central for the dynamics of macroeconomic models, there is little empirical evidence on this topic. We use the German AWFP dataset to document that wage cyclicalities are very heterogeneous across establishments. Based on this heterogeneity, we estimate the relationship between employment cyclicality and wage cyclicality at the establishment level. We use this micro-estimate as a calibration target for a macro labor market flow model with heterogeneous wage dynamics that nests the standard search and matching model. Based on this micro-macro linkage, we provide a new quantitative benchmark for the role of wage rigidity in search and matching models. Furthermore, we show that acyclical and countercyclical wage establishments are key drivers for stronger labor market reactions in recessions than in booms.

Co-essentiality of money and credit: A mechanism-design view

Under what conditions are money and credit jointly essential for trade? We answer this question by applying a mechanism-design approach to a standard monetary search model, augmented with two types of credit technologies. First, payment can be enforced up to some exogenous amount (enforcement-based credit). Second, default on past promises can be partially monitored by future trading partners (monitoring-based credit). We characterize implementable allocations subject to individual rationality and bilateral efficiency of trades. Consistent with prior literature, we find that money and monitoring-based credit cannot be jointly essential. However, we show that money and enforcement-based credit are jointly essential as long as neither payment instrument by itself is sufficient to implement a first-best. Money is memory, but it is not enforcement.

Worker selectivity and fiscal externalities from unemployment insurance

A robust prediction of job search models is that unemployment insurance (UI) makes workers more selective about which jobs they accept, thereby raising average accepted wages and thus generating a positive fiscal externality. We provide a sufficient-statistics formula for evaluating the size of this selectivity effect and argue theoretically that it is likely to be small. In a standard sequential search model, the effect of UI on wages is linked to its effect on the job-finding hazard; the slope of the relationship between these elasticities depends on a small number of estimable statistics, key among them observed worker flows. Plausible calibrations of the model imply that the magnitude of the wage elasticity is small relative to the job-finding elasticity. Although ignoring the wage effect of UI would over-estimate its fiscal cost and under-estimate its welfare benefit, the model-implied formula predicts the magnitude of this bias to be small.

Immigration, skill acquisition, and fiscal redistribution in a search equilibrium model

AbstractAs recent immigration flows are reshaping the host countries workforce composition, this paper aims to assess whether age composition and skill adjustment dynamics play a relevant role in the welfare impact of immigration. To this end, we build and simulate a search and matching model that allows for endogenous natives’ skill acquisition and intergenerational transfers to analyze the welfare effects of immigration on a selected group of 19 OECD countries. The obtained results are then compared with those obtained under different assumptions on age composition and skill adjustment dynamics. Our comparative statics analysis shows that stronger job creation effects take place when natives adjust their skill in response to immigration. Moreover, taking into account age composition plays a key role in assessing the fiscal impact of immigration, which turns out to be positive when we include intergenerational transfers to retirees and immigration is high-skilled. Finally, we find that our model yields more optimistic welfare effects than standard search models that abstract from skill decision and intergenerational redistribution.

Nonlinear unemployment effects of the inflation tax

Long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. We show this using a standard monetary search model with two shocks – productivity and monetary – and frictions in both labor and goods markets. Inflation lowers the surplus from a worker–firm match, in turn making it more sensitive to both productivity shocks and further increases in inflation. We calibrate the model to match key aspects of the US labor market and monetary data. The calibrated model is consistent with a number of empirical correlations, which we document using panel data from the OECD: (1) there is a positive long-run relationship between anticipated inflation and unemployment; (2) there is also a positive correlation between anticipated inflation and unemployment volatility; (3) the long-run inflation-unemployment relationship is stronger when unemployment is higher. The key mechanism through which the model generates these results is the negative effect of inflation on measured output per worker, which is likewise consistent with cross-country data. Finally, we show that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate uncertainty.

Start-up Search Costs

Workhorse economic models used for studying the market impacts of search frictions assume constant search costs: individuals pay the same cost to obtain price information each time they search. This paper provides evidence on a new form of search costs: start-up costs. Exploiting a natural experiment in retail gasoline, we document how a temporary, large exogenous shock to consumers’ search incentives leads to a substantial, permanent increase in price search. A standard search model fails to explain such history dependence in search, while it follows directly from a model with a one-time up-front cost to start searching. (JEL D83, L13, L81)

Evidence on Job Search Models from a Survey of Unemployed Workers in Germany

Abstract The job-finding rate of unemployment insurance (UI) recipients declines in the initial months of unemployment and then exhibits a spike at the benefit exhaustion point. A range of theoretical explanations have been proposed, but those are hard to disentangle using data on job finding alone. To better understand the underlying mechanisms, we conducted a large text-message-based survey of unemployed workers in Germany. We surveyed 6,349 UI recipients twice a week for four months about their job search effort. The panel structure allows us to observe how search effort evolves in individuals over the unemployment spell. We provide three key facts: (i) search effort is flat early on in the UI spell, (ii) search effort exhibits an increase up to UI exhaustion and a decrease thereafter, (iii) UI recipients do not appear to time job start dates to coincide with the UI exhaustion point. A standard search model with unobserved heterogeneity struggles to explain the second fact, and a model of storable offers is not consistent with the third fact. The patterns are well captured by a model of reference-dependent job search or by a model with duration dependence in search cost.

Nonlinear Unemployment Effects of the Inflation Tax

<ns3:p>We argue that long-run inflation has nonlinear and state-dependent effects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks – productivity and monetary – and frictions in labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it sensitive to productivity shocks or to further increases in inflation. We calibrate the model to match the U.S. postwar labor market and monetary data, and show that it is consistent with observed cross-country correlations. The model implies that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate shocks.</ns3:p>

A first aid kit to assess welfare impacts

We develop a simple framework to measure the impacts of an economic shock on unemployed workers’ welfare quantitatively. We follow the sufficient statistics approach in consulting traditional economic models, and use a standard job search model to derive the sufficient statistics to identify the impacts. We then apply our framework to assess the impacts of the coronavirus disease 2019 (COVID-19) by using regional data of the United States, and international data. Analysis reveals the regions and countries that are severely damaged by the COVID-19.

Why is unemployment so countercyclical?

We argue that wage inertia plays a pivotal role in allowing empirically plausible variants of the standard search and matching model to account for the large countercyclical response of unemployment to shocks.

Adaptive Learning and Labor Market Dynamics

AbstractThe standard search and matching model with rational expectations is well known to be unable to generate amplification in unemployment and vacancies. We document a new feature that cannot be replicated: properties of wage forecasts published by institutions in the near term. A parsimonious model with adaptive learning can provide a solution to both of these problems. Firms choose vacancies by forecasting wages using simple autoregressive models; they have greater incentive to post vacancies at the time of a positive productivity shock because of overoptimism about the discounted value of expected profits.

Nonlinear Unemployment Effects of the Inflation Tax

We argue that long-run inflation has nonlinear and state-dependent e ects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks - productivity and monetary - and frictions in labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it sensitive to productivity shocks or to further increases in inflation. We calibrate the model to match the US postwar labor market and monetary data and show that it is consistent with observed cross-country correlations. The model implies that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate shocks.

Online Advertising as Passive Search

Standard search models assume that consumers actively decide on the order, identity, and number of products they search. We document that online, a large fraction of searches happen in a more passive manner, with consumers merely reacting to online advertisements that do not allow them to choose the timing or the identity of products to which they will be exposed. Using a clickstream panel data set capturing full URL addresses of websites consumers visit, we show how to detect whether a click is ad-initiated. We then document that ad-initiated clicks account for more than half of all website arrivals, are more concentrated early on in the consumer search process, and lead to less in-depth searches and fewer transactions, consistent with the passive nature of these searches. To account for these systematic differences between active and passive searches, we propose and estimate a simple model that accommodates both types of searches, and describe the estimation bias arising in models that incorrectly treat all searches as active. Finally, we use our model’s estimates to describe consumer substitution patterns across websites under different advertising scenarios.

Search, shirking and labor market volatility

This paper proposes a modified version of the standard search and matching model of the labour market that includes a shirking mechanism. We show that our model delivers a close match to the simulated volatilities, correlations and autocorrelations of unemployment, vacancies, labour market tightness and the job finding rate with values observed in US data. In doing so, it outperforms prominent alternative models. Our model also has novel policy implications for the impact of income taxes, subsidies on hiring and employment taxes on unemployment and its volatility.