Department of Economics, UCSD

In the U.S. labor maarket, the vacancy-unemployment ratio and unemployment react sluggishly to productivity shocks. We show that the job matching model in its standard form cannot reproduce these patterns due to excessively rapid vacancy responses. Extending the model to incorprate sunk costs for vacancy creation yields highly realistic dynamics. Creation costs induce entrant firms to smooth the adjustment of new openings following a shock, leading the stock of vacancies to react sluggishly.