We consider a model with on-the-job search where current wages depend only on current aggregate labor market conditions and match-specific idiosyncratic productivities. We nevertheless show that the model replicates findings which have been interpreted as evidence against a spot market model. Past aggregate labor market conditions such as the lowest unemployment rate during a job spell or the unemployment rate at the start of the job have explanatory power for current wages since the expected wage is increasing in the expected number of offers received since the job started. The business-cycle volatility of wages is higher for new hires and for job-to-job switchers than for job stayers since workers can sample from a larger pool of job offers in a boom than in a recession. Using NLSY and PSID data, we find that the existing evidence against a spot market model is rejected once we control for match-specific productivity as implied by our theory.
Joint work with Iourii Manovskiiz (University of Pennsylvania).