Very Preliminary

This paper re-visits the negative co-movement of unemployment and job vacancies over the business cycle by using a search and matching model. We develop an endogenous job separation model with on-the-job search and cyclical macroeconomic shocks. Incorporation of on-the-job search substantially improves the ability of the standard search and matching model with endogenous job separation to explain the cyclicality of labor market variables. Our model generates the pro-cyclicality of job vacancies and thus the negative co-movement of unemployment and job vacancies, which the standard endogenous separation model often fails to generate. Moreover, our model generates enough cyclical amplitude in the unemployment rate and the job \u85nding rate to match what we observed in the data