The cyclical upgrading of labor and on-the-job search

This paper examines patterns of worker reallocation in the search and matching model of the labor market. We show that on-the-job search is crucial for explaining the observed cyclical upgrading of workers to better employment opportunities in booms. This is due to the rising availability of employed searchers which facilitates recruitment for newly created high-wage jobs. The standard model fails to exhibit such behavior. At the same time, the model is consistent with salient features of labor market dynamics, such as the volatility of vacancies and unemployment, and a highly procyclical rate of job-to-job transitions. This suggests an important channel for the reallocation of workers across jobs as well as the propagation of aggregate shocks.