The cyclical behavior of unemployment, vacancies, and wages

We incorporate time to build and a stochastic value of home production- two stan-dard features of the RBC model- into the Mortensen Pissarides search and matching model. We show that a reasonable calibration of the extended model delivers not only the fluctuations in unemployment and vacancies that are consistent with the data, but also delivers the right standard deviation of wages and the correlation of market tightness and wages with productivity – the shortcomings of the standard model that re-ceived considerable attention in the literature. As part of the empirical investigation we uncover that the correlations between productivity and labor market variables depend strongly on the data used to measure employment