Job Ladder and Business Cycles

The idea that workers continue to search for more productive and better-paying jobs while employed is an old one in labor economics. Usually portrayed as workers climbing the job ladder, the notion of the on-the-job search has proven very successful at interpreting and rationalizing the body of empirical evidence on individual labour market turnover and wage dynamics. At the aggregate level, this turnover is a major force moving workers across firms, occupations and locations, with profound effects on productivity growth. At an individual level, the process constitutes an important source of wage growth.

I build a heterogeneous agent incomplete market model with rich labour market dynamics that give rise to a job ladder structure. Workers move slowly toward more productive and better-paying jobs through job-to-job transitions, while negative shocks occasionally throw them back into unemployment. The entire distribution of workers over savings, earnings and jobs is part of the state of the economy, and it shifts in response to aggregate shocks.

I calibrate the model to the US economy and use it to explore the role of the ladder during the US Great Recession period and its aftermath. In the wake of the recession, the ladder basically collapsed:

• firms reduced hiring
• unemployment increased
• job-to-job transitions declined

This left workers’ wages stagnant for several years, contributing to the sharp contraction and slow recovery of consumption. On the supply side, the slowdown in job-to-job transitions caused workers to remain stuck at the bottom of the ladder, cutting total labour productivity growth. I show that the interaction between weak demand and low productivity helps to make sense of the missing disinflation of the period.