Job Reallocation, Unemployment and Hours in a New Keynesian Model

This paper focuses on the reallocation of labour resources in a New Keynesian environment with labour market search and endogenous separations. We show that the introduction of variation in hours per worker alters the incentives for intertemporal substitution in a way that generates a more steeply downward sloping Beveridge curve and reduces the tendency to synchronize gross job flows. We find that the impact of labour supply elasticity on the slope of the Beveridge curve and the correlation of gross job flows is determined primarily by variation in the response to monetary shocks. When hours variation is suppressed, the correlation of job creation with job destruction and that of unemployment with vacancies are strongly positive in response to monetary shocks. With variation in hours both measures of reallocation take on the correct negative sign.