In this paper, the authors model a job-specific shock process in the matching model of unemployment with noncooperative wage behavior. They obtain endogenous job creation and job destruction processes and study their properties. The authors show that an aggregate shock induces negative correlation between job creation and job destruction, whereas a dispersion shock induces positive correlation. The job destruction process is shown to have more volatile dynamics than the job creation process. In simulations, the authors show that an aggregate shock process proxies reasonably well the cyclical behavior of job creation and job destruction in the United States.

A stochastic dynamic model of labour supply is specified and analysed empirically. The theoretical model provides a sound structural economic basis for a class of empirical models which have been shown useful. The implications of the estimated model are explored and diagnostic checks are suggested and implemented.