Abstract:
We develop an equilibrium model of on-the-job search with ex-ante heterogeneous workers and firms, aggregate uncertainty and vacancy creation. The model produces rich dynamics in which the distributions of unemployed workers, vacancies and worker-firm matches evolve stochastically over time. We prove that the surplus function, which fully characterizes the match value and the mobility decision of workers, does not depend on these distributions. We illustrate the quantitative implications of the model by calibrating to US aggregate labor market data from 1951-2007. The model has rich implications for the cyclical dynamics of labor productivity and sorting.