Equilibrium Wage Rigidity in A Search and Matching Model with Replacement Hiring

I propose a new search-and-matching model in which wage rigidity and volatile unemployment endogenously arise. The Diamond-Mortensen-Pissarides model is generalized by incorporating job-ladder and vacancy-chain effects arising from on-the-job search and replacement hiring into a long-lived jobs framework. The presence of replacement hiring (i) enhances unemployment volatility by reducing crowding out of unemployed workers due to employed searchers and (ii) makes equilibrium wages less responsive to productivity fluctuations by increasing procyclicality of the firm's outside option value in wage negotiations---during expansions, firms have increased chances to replace a poorly-matched worker with a better-matched worker