| Abstract |
I propose a search-and-matching model in which wage rigidity and volatile unemployment endogenously arise. The model features job-ladder and vacancy-chain effects arising from on-the-job search and replacement hiring. In equilibrium, employed job searches are procyclical, and thus, the quality of job seekers increases during expansions. As a result, firms have increased opportunities to replace the existing poorly-matched worker with a well-qualified worker, and equilibrium wages are less responsive to a rise in productivity especially for poorly-matched/lower-paying jobs due to the enhanced firm's outside option value in wage negotiations. The calibrated model increases the unemployment volatility by 130 percent and reduces the aggregate wage volatility by 30 percent. |