Labor Turnover Costs and the Cyclical Behavior of Vacancies and Unemployment

This paper extends the Diamond-Mortensen-Pissarides (DMP) matching model with endogenous job destruction by introducing postmatch labor turnover costs. We consider training and separation costs that create heterogeneity among workers. In particular, there are two types of employed workers: (i) new entrants who need training in order to become fully productive, and (ii) incumbents who are fully productive and whose departure from the firm imposes costs on it. We find that our calibrated model, relative to the standard DMP model, comes closer to the data regarding the volatility of vacancies and unemployment without introducing unrealistic sensitivity to policy changes. Moreover, our extended model nearly reproduces the downward-sloping Beveridge curve, which is unusual when endogenous job destruction exists in this type of model.