Job Destruction and Propagation of Shocks

This paper considers propagation of aggregate shocks in a dynamic general-equilibrium model with labor-market matching and endogenous job destruction. Cyclical fluctuations in the job-destruction rate magnify the output effects of shocks, as well as making them much more persistent. Interactions between capital adjust-ment and the job-destruction rate play an important role in generating persistence. Propagation effects are shown to be quantitatively substantial when the model is calibrated using job-flow data. Incorporating costly capital adjustment leads to significantly greater propagation. (JEL E24, E32) It has been well documented that the cyclical adjustment of labor input chiefly represents move-ment of workers into and out of employment, rather than adjustment of hours at given jobs. Thus, in understanding business cycles, it is cen-trally important to understand the formation and breakdown of employment relationships. The na