Going the Extra Mile: Effort by Workers and Job-Seekers

Abstract

In the search-and-matching model, equilibrium indeterminacy obtains when wages respond strongly to a labor market tightening, and hiring is very elastic. We introduce two types of effort into such a model. Variable labor effort gives rise to short-run increasing returns to hours in production. This amplifies profit expectations and firms' hiring incentives expanding the indeterminacy region. Variable search effort makes workers search more intensively in a tighter labor market. The procyclical nature of the resource cost of searching stabilizes firms' inclination to hire, shrinking the indeterminacy region. Indeterminacy disappears completely when vacancy posting costs are replaced with hiring costs.