Evaluating Business Cycle Models with Labor Market Search

Incorporating labor market search in general equilibrium models has been shown to generate realistic dynamics in employment, job creation, and job destruction and to increase the magnitude and persistence of the impact of productivity shocks on output. This paper studies the extent to which the empirical successes of those models are dependent upon specifications of the matching process that can exaggerate the level of unemployment, making possible large employment flows in response to business cycle shocks. Even with more realistic specification of labor turnover, models with labor market search still generate larger and more persistent propagation of productivity shocks than do traditional real business cycle models, but those effects are smaller than produced by previous search models. The ability of such models to explain job creation and destruction dynamics is also found to be sensitive to the choice between alternative plausible specifications of the model.