April 2003

IZA DP No. 753: Unemployment Equilibrium and On-the-Job Search

published as 'Worker Flows, Job Flows and Unemployment in a Matching Model' in: European Economic Review, 2010, 54 (3), 393-408

This paper uses the search and matching framework to explore the impact of employed job search on the labour market. The specific features of our model are endogenous employed job search, flows in and out of the labour force, endogenous job destruction and heterogenous job creation. Also, job flows and workers flows do not coincide as we allow for job-to-job flows and labour force entries and exits. Employed job search is shown to have a substantial impact on unemployment dynamics but a negligible one on the level of unemployment. More on-the-job search leads to lower unemployment inflow and outflow, i.e. a more stagnant unemployment pool. With employed job search, the stock of vacancies is more cyclically sensitive, the unemployment outflow less cyclically sensitive and the unemployment inflow more cyclically sensitive than without employed job search. With our model, the impact of a change in unemployment benefit does not only occur through the conventional decrease in the unemployment outflow rate, but also through an increase in the unemployment inflow rate. The calibrated version of our model replicates well the cyclical behaviour of job and worker flows observed in the data.