Search, shirking and labor market volatility

Abstract

This paper proposes a modi®ed version of the standard search and matching model of the labour market that combines a shirking mechanism with the assumption that ®rms post wages. We argue that a small shirking e ect will generate a low rate of pro®t and lead to a low rate of vacancy creation, implying that the vacancy ®lling rate is high. Through this mechanism we show that our model delivers a close match of the simulated volatilities, correlations and autocorrelations of unemployment, vacancies, labour market tightness and the job ®nding rate with values observed in US data. In doing so, it outperforms prominent alternative models.