This paper provides new evidence for cyclicality in the job-search effort of employed workers, on-the-job search (OJS) intensity, in the U.S. using American Time Use Survey and various cyclical indicators. We find that the probability of an employed worker to engage in OJS is statistically significantly countercyclical, while time spent on OJS of an employed job seeker is weakly countercyclical. The fear of job loss, employment uncertainty, and workers’ financial situations is crucial in the job search decision of employed individuals. The results imply that the precautionary motive might be the key driver of the countercyclicality in OJS intensity.
Appendix: The Cyclicality of On-the-Job Search Effort
1 Alternative Theory
The appendix provides alternative theoretical explanations for the empirical findings. The theory is intended to characterize the countercyclicality in OJS intensity–that is–employed individuals, on average, search harder for a new job as the current labor market condition deteriorates, and they feel more uncertain about the future economic situation and pessimistic about their financial situation. The main feature of the model is that workers who already have a job are likely to look for a new job to insure against possible income or job loss in the future, which is the precautionary motive of job search. This implies that job search activity can be seen as analagous to saving.
Consider a two-period consumption model of a worker who already has a job in the first period. The worker is risk averse, and derives utility from consumption. However, she derives disutility from the effort she spends on searching for a new job. Assume that workers do not have access to complete insurance market. Suppose, for simplicity, that saving technology does not exist in this economy. The worker self-insures against possible income loss in the future by raising job-search effort in the first period, when she expects the labor market conditions to deteriorate in the second period or feels uncertain about the labor market situation in the future. By searching hard for a new job, it becomes easier for her to find a job in case she loses her current job, or to switch to a better-paying employer when she experiences a wage cut at her current job. The model is a partial equilibrium model where labor market variables such as the job-arrival rate, job-destruction rate, employment volatility, and wages are determined exogenously.
1.2 Model Timing
First period: In the first period, the worker earns wage, w1, and decides how much of her income she will spend on consumption, c1, and job search, s1.
Second period: In the second period, separation takes place. The worker becomes unemployed with probability δ2. When the worker loses her job, she remains unemployed and receives the unemployment insurance benefit b if the worker did not search for a job in the first period. Or she can find a new job with probability p2 and earn wage w2, if the worker did job-search activities in the first period. When the worker does not lose her job, she can either stay with her current employer, and gets wage w2 if she did not search for a new job. Or she can switch to a new employer with probability p2 and earn wage w2 + μ with μ > 0 if she looked for a new job in the first period.
The worker has imperfect knowledge about the labor market condition in the second period. Therefore, her second-period consumption is a random variable that depends on her second-period income.
Let f2 be the aggregate job-finding probability. Then, an employed individual’s probability of finding a new job, p2, is a function of s1 and f2 as follows:
We assume that and .
In this set-up, the employed worker’s problem is written into the following.
If we retain the assumption β = 1, for simplicity, the first-order necessary condition for optimal consumption and search effort is obtained from the following Euler equation
Equation (1) says that the worker should be indifferent between, on the one hand, consuming one more unit in period one and, on the other hand, spending one unit for job search in period one and consuming the units equivalent to the expected outcome of job search in period two. Note that the term in brackets is the rate of return from job search. The key difference from the usual consumption Euler equation is that the rate of return from one unit of job search depends on the expected values of stochastic parameters, δ2, w2, and f2, while the rate of return from saving is a fixed parameter in a usual model of consumption and saving.
Suppose that there is a sufficient statistic of labor market condition in period two, denoted as that determines the labor market variables in the second period. Let be the realized utility from consumption in the second period, then
Assume that and exist. If we take derivatives of both sides of Equation (2) with respect to s1, then we have
Let be the value of expected in period 1. Then, the optimal level of job search in the first period is also determined by Suppose that where , and . We assume that h = 1 to simplify our analysis, as suppressing the notation h does not influence the key feature of the model. Suppose in addition that where .
Approximating Equation (3) using Taylor expansion, it follows that
Let for notational convenience. If we assume that the utility function is a log function, Equation (1) is rearranged into
where , , and , and
If we are willing to assume that δ, w, and f are persistent processes, then the expected values of δ2, w2, and f2 are positively correlated with δ1, w1, and f1. In addition, note that is not zero, as Equation (4) implies that consumption in the first period should be zero, otherwise.
In addition, the rate of return from one unit of job search should be higher when there is uncertainty to compensate for the risk of job search. The following lemma provides the necessary condition for the risk premium associated with job search to be positive.
If is between 0 and 1, the rate of return from job search is higher when there is uncertainty.
Without uncertainty about the labor market condition in the second period, the rate of return from job search implied by the Euler Equation (1) is
The Euler Equation (4) suggests that the rate of return from job search when there is uncertainty is
For the rate of return from job search in the presence of uncertainty to be higher than that without uncertainty, .
Note that is the parameter determining the size of risk premium associated with the rate of return from OJS.
Based on the Euler equation (1), now we can analyze how , , and σ2 affect the job search effort in the first period.
If is positive, job search effort increases as labor market uncertainty, σ2, rises.
The Euler equation (1) is rearranged into
Using the implicit function theorem, the derivative is written into the following,
where and are the following:
If and , then .
Job search effort increases, as the job loss rate rises
The implicit function theorem gives
of which the sign is determined by
Therefore, and thus .
Job search effort increases to a fall in future wages, if the wage gain associated with switching to a new job is sufficiently large. Job search effort decreases to a fall in future wages, otherwise.
The implicit function theorem gives
of which the sign is determined by
if , and if .
The corollary implies the following. When workers expect the wage from current job to fall in the future, then they will search harder for a new job, if they can get a much higher wage at a new job. Otherwise, when wages fall, it is more beneficial for a worker to reduce job-search effort and to stay unemployed receiving the unemployment insurance benefit when losing the current job.
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