Events

Dr. Zhifeng Cai
Assistant Professor
Rutgers University

Labor market quits and vacancies have risen sharply relative to the pre-Great Recession period. What accounts for this increase, and how generous should social insurance be when quits are an important driver of transitions into non-employment? We address these questions using a multi-sector directed search model extended to incorporate endogenous quits. We find that a decline in vacancy posting costs is consistent with both an increase in quits and rise in labor market tightness (the ratio of vacancies to unemployment). We find that unemployment insurance is optimally much less generous in an economy with endogenous quits than in one without. We trace that result to the interaction between a lack-of-commitment externality and a fiscal externality that jointly drive excessive quitting and excessive pickiness in job search.