George Akerlof, Andrew Rose, and Janet Yellen (1988): Job Switching and Job Satisfaction in the U.S. Labor Market; Noted

George Akerlof, Andrew Rose, and Janet Yellen (1988): Job Switching and Job Satisfaction in the U.S. Labor Market

Quits are procyclic because vacancy chains are longer when unemployment is low. The expected length of a vacancy chain… varies inversely with the unemployment rate. Vacancy chains are short when unemployment is high because the number of jobseekers who are unemployed or out of the labor force is large relative to the number of employed jobseekers. In this case, the probability of recruiting an unemployed individual to any given vacancy, thus ending the chain, is high. In a high-pressure, low-unemployment economy, there are fewer unemployed or out-of-the-labor-force jobseekers relative to employed jobseekers; thus vacancy chains are longer. The logic of the vacancy chain explains why total quits (and especially E-to-E quits) are procyclic. Quits increase as opportunities expand; the opportunities for job switching are significantly greater when unemployment is low than when it is high….

In addition to generating positive predictions consistent with observed patterns of labor turnover, models with involuntary unemployment have interesting normative implications. We show that a reduction in unemployment raises welfare by more than the output gain captured in Okun's Law, since improved matching between workers and jobs creates an additional welfare benefit.