The response of employment and wages to aggregate shocks: On-the-job search effect

Author-Highlights•The calibrations are based on empirical estimates drawn from several different sources based on worker flow, industry panel, and individual worker panel data for the U.S.•The responses of the job finding rate and average wage paid in the model to an aggregate shock are computed and compared with that reported by Shimer (2005).•The principal result is that the model can explain the size of the elasticity observed when workers search on-the-job to the extent estimated in the data. In others words, the model solves the “Shimer Puzzle.”

The purpose of the paper is to study and quantify the possible importance of on-the-job for the fluctuations in the job finding rate within an alternative market equilibrium framework to that of the Diamond–Mortensen–Pissarides model recently introduced by Coles and Mortensen (2013). In the process we show that the Coles–Mortensen model can easily explain the magnitudes of worker flow fluctuation reported by Shimer (2005) for the 50 year post WWII period in the U.S. as well as the observed real wage rigidity.