ffi cient Job Upgrading , Search on the Job and Output Dispersion ∗

A worker’s job can be improved through on-the-job search (OJS) and job upgrading. Incorporating these external and internal job dynamics into a directed search model, this paper analytically characterizes the socially efficient allocation and quantitatively evaluates the model. The analysis shows that efficient OJS is front-loaded in a worker’s career and stops after a finite number of job switches, but efficient job upgrading continues throughout the career and may be backloaded. OJS and job upgrading generate a job ladder in output and productivity among identical workers, i.e., frictional dispersion. The endogenous ladder also implies a positive return to tenure and a cost of job loss. When the model is calibrated, frictional dispersion, the return to tenure and the cost of job loss are large. Moreover, the analysis reveals the importance of the calibrated feature that the marginal cost of a vacancy increases in the job type. If the marginal cost of a vacancy is non-increasing in the job type, the social planner will choose the starting job to be high and leave very little room for OJS or job upgrading. JEL classification: E24; J60.