The original Mortensen-Pissarides model possesses two elements that are absent from the commonly used simplified version: the job destruction margin and training costs. I find that these two elements enable a model driven only by productivity shocks to simultaneously explain most of the movements in unemployment, vacancies, job destruction, job creation, the job finding rate and wages. The role of the job destruction margin in propagating productivity shocks is to create an additional pool of unemployed at the very beginning of a recession. The role of training costs is to explain the simultaneous decline in vacancies.

  Abstract: Variations in the labor wedge account for a large fraction of business cycle fluctuations. We provide an interpretation of the labor wedge from a search-theoretic perspective and assess the importance of job creation and job destruction shocks for business cycles. We find that the labor wedge is mainly driven by shocks to matching efficiency. However, in a recession, job destruction shocks account for the initial increase in unemployment, while negative job creation shocks are responsible for the slow recovery. Finally, we find that allowing for changes in the reservation value of workers helps match both the low volatility of wages and the high volatility of unemployment and vacancies.

  Abstract. What is driving structural transformation? Some argue that it can be driven by different income elasticities, and others say that differences in productivity growth are the source of labor reallocation. We present a unifying framework which allows us to quantify the importance of supply and demand mechanisms for structural transformation and see how these forces change over time.