This paper examines the stability of the equilibrium in a macroeconomic model with labor search and matching frictions, incorporating two additional features. The first allows workers to provide variable effort, which generates increasing returns to hours in production. The second feature is variable search effort, through which agents actively search for a job, as opposed to the standard model with a one-sided search (on the part of firms).
This paper identifies two channels explaining the stability of the model, which is adversely affected by the 'wage channel' and positively affected by the 'hiring costs channel'. In the presence of workers' variable effort, their marginal product and therefore wages increase, expanding the combinations of parameters under which the model is not stable. In the second extension, workers are more active in search, limiting the increase in wages; therefore, the combinations of parameters generating stability increase.
Forthcoming in: Journal of Money, Credit and Banking.