Directed Search over the Life Cycle

By Guido Menzio, Irina A. Telyukova and Ludo Visschers

http://d.repec.org/n?u=RePEc:pen:papers:12-002&r=dge

We develop a life-cycle model of the labor market in which different worker-firm matches have different quality and the assignment of the right workers to the right firms is time consuming because of search and learning frictions. The rate at which workers move between unemployment, employment and across different firms is endogenous because search is directed and, hence, workers can choose whether to seek low-wage jobs that are easy to find or high-wage jobs that are hard to find. We calibrate our theory using data on labor market transitions aggregated across workers of different ages. We validate our theory by showing that it correctly predicts the pattern of labor market transitions for workers of different ages. Finally, we use our theory to decompose the age profiles of transition rates, wages and productivity into the effects of age variation in work-life expectancy, human capital and match quality.

This paper is a good example of the progress labor search theory is making in capturing the complex realities of the job market. The life cycle element here is a major addition, and models like this will be useful to understand the impact of labor market policies on different age cohorts.

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