Business Cycles and Labor-Market Search

The quantitative implications of labor-market search for economic fluctuations are evaluated in the context of a real-business-cycle model. Incorporating labor-market search into the model is found to improve its empirical performance along several dimensions. In particular, hours now fluctuate substantially more than wages and the contemporaneous correlation between hours and productivity falls. In addition, the model replicates the observation that output growth displays positive autocorrelation at short horizons. Overall, the empirical results suggest that the labor-market-search environment embodies a quantitatively important propagation mechanism. Copyright 1996 by American Economic Association.