Wage Posting and Business Cycles: a Quantitative Exploration

We provide a quantitative exploration of business cycles in a frictional labor market under contract-posting. The steady-state random search and wage-posting model of Burdett and Mortensen (1998) has become the canonical structural framework for empirical analysis of worker turnover and equilibrium wage dispersion. In this paper, we provide an efficient algorithm to simulate a dynamic stochastic equilibrium version of this model, the Stochastic Burdett-Mortensen (SBM) model, and evaluate its performance against empirical evidence on fluctuations in unemployment, vacancies and wages