No . 734 TECHNOLOGICAL PROGRESS , ON - THE - JOB SEARCH , AND UNEMPLOYMENT

This paper studies the impact of long-run productivity growth on job …nding and separation rates, and thus the unemployment rate, using a search and matching model. We incorporate disembodied technological progress and on-the-job search into the endogenous job separation model of Mortensen and Pissarides (1994). The incorporation of on-the-job search allows faster growth to reduce unemployment by decreasing the separation rate and inducing job creation. We demonstrate that introducing on-the-job search substantially improves the ability of the Mortensen and Pissarides model to explain the impact of growth on unemployment. Our quantitative analysis shows that our model increases the magnitude of the negative impact of growth on unemployment compared to the standard matching model with disembodied technological progress. Keywords: Growth; Unemployment; Search-matching model; On-the-job search JEL Classi…cation: E24;J64;O40 We are grateful to Steven Durlauf, John Kennan, Rasmus Lentz, Yoshimasa Shirai, and Shintaro Yamaguchi for their invaluable comments and suggestions. We also thank Rebecca Lessem, John Morrow, Michael Rapp, and Jiao Shi and seminar participants at ISER at Osaka University for their helpful comments. This paper was awarded the 11th ISER-Moriguchi Prize. All remaining errors are ours. yCorresponding author. Mailing Address: University of Wisconsin-Madison, Department of Economics, 1180 Observatory Dr, Madison, WI 53706-1393, USA. E-mail: [email protected].