Should-Read: Guido Menzio and Shouyong Shi: Efficient Search on the Job and the Business Cycle

Should-Read: Guido Menzio and Shouyong Shi: Efficient Search on the Job and the Business Cycle: “A model of directed search… in which transitions… between unemployment and employment and across employers are driven by heterogeneity in the quality of firm-worker matches…

…Agents’ value and policy functions are independent of the endogenous distribution of workers across employment states. Hence, the model can be solved outside of the steady state and used to measure the effect of cyclical productivity shocks on the labor market. Productivity shocks… generate large fluctuations in workers’ transitions, unemployment, and vacancies when matches are are experience goods, but not when matches are inspection goods…