The Paradox of Search Effort and Rational Labor Stampedes
46 Pages Posted: 26 Apr 2018 Last revised: 27 Oct 2019
Date Written: October 23, 2019
Standard labor search and matching models feature procyclical search intensity and quick recoveries. Both predictions are at odds with the US labor market after the Great Recession. This paper shows that in an otherwise standard model that incorporates multi-market simultaneous search, a temporary financial crisis can raise both search intensity and unemployment persistently, like a stampede to an unemployment trap—workers search harder but end up discouraging job creation—even if only a fraction of workers can conduct simultaneous search. The observed productivity shocks reduce search effort and do not cause such hysteresis. Subsidizing entry costs can bring quick recovery.
Keywords: Search Intensity, Unemployment, Jobless Recovery, Financial Shocks, Simultaneous Search
JEL Classification: E24, J64
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