Master's Degree in Economics and Finance

Master's Degree in Specialized Economic Analysis

Master's Degree in Data Science

Admissions

Career Services

Alumni Community

Economics Program

Financial Economics Program

PhD Economics Track Program

Go to Master's degrees

Close

Worker Reallocation, Occupational Mismatch, and Business Cycles

Project overview

Over the business cycle, labor markets face a large amount of reallocation: firms create and destroy vacancies, work relationships are formed and resolved, and workers change jobs and careers. This project investigates, theoretically and empirically, how business cycles affect the skill allocation of workers to jobs and quantify its impact on labor productivity.

It focuses on the role of information frictions, in the form of workers’ uncertainty about their abilities in an occupation, and labor market imperfections, such as search and mobility costs, in generating occupational mismatch—the misalignment between workers’ abilities and the requirements of their occupations. It finds that two opposing forces determine the business cyclicality of mismatch. On the one hand, in recessions, underqualified workers are fired, specifically those that are occupied at the bottom rungs of the job ladder. This cleansing effect reduces mismatch among ongoing work relations, raising the average labor productivity of workers continuously employed for two years by 1.3 percent. On the other hand, the mismatch among new hires increases in recessions, primarily caused by an increase in overqualification among workers hired for low-complexity jobs. This sullying effect reduces the labor productivity of new hires by 0.9 percent. The cleansing and sullying effect are consistent with direct evidence of the cyclicality of mismatch, although the cleansing effect unambiguously dominates at the aggregate.

Main results

A new tractable framework was developed with multi-dimensional sorting, directed search in the labor market, information frictions, and aggregate fluctuations in productivity
New facts about the cyclicality of mismatch and career mobility were documented
The two opposing forces shaping the cyclicality of mismatch are in fact both manifestations of the cleansing of underqualified workers, which increases career mobility in recessions and in turn heightens mismatch among new hires

Summary, output, and dissemination

Research summary

There are three main parts to this project:

1. During this project, a new tractable framework was developed with multi-dimensional sorting, directed search in the labor market, information frictions, and aggregate fluctuations in productivity. This model is well-suited for informing the measurement of mismatch cyclicality, performing counterfactuals, and conducting welfare analysis. In our model, workers differ in skills along multiple dimensions and sort into jobs with heterogeneous skill requirements along those dimensions. Skill mismatch arises due to information and labor market frictions, and its cyclical dynamics are shaped partly by endogenous occupational mobility. Importantly, we entertain a task-based definition of occupations and define switching as a transition between two sufficiently distant occupations in terms of their skill mix.

2. The second part of this project used the worker-level data from the 1979 National Longitudinal Survey of Youth and occupational descriptors from the O*NET project of the US Department of Labor, and new facts were documented about the cyclicality of mismatch and career mobility. In recessions, under-qualified workers are fired, specifically those at the bottom rungs of the job ladder, which reduces mismatch among ongoing work relations (cleansing effect). This project discovered that there is an endogenous increase in occupational switching, which leads to higher mismatch when re-hired at the bottom of a new job ladder (sullying effect). While both the cleansing and sullying effects are present, overall the cleansing effect dominates, and occupational mismatch is pro-cyclical.

3. In the third part of this project, the model was compared to the U.S. and shows that it replicates salient business cycle properties of occupational mismatch. Job transitions in and out of bottom job rungs, combined with career mobility, are essential to account for the empirical fit. Our theoretical findings are explained by a non-trivial interaction between job mobility and mismatch: Whereas transitions within a given career path (to jobs that employ similar skills) tend to reduce mismatch as workers re-sort across job rungs in response to belief revisions, transitions into new career paths (to jobs that employ previously untried skills) tend to increase mismatch as a consequence of higher uncertainty. Accordingly, the cyclicality of mismatch is closely entangled with the business cycle dynamics of career mobility. Specifically, our model predicts that career mobility is countercyclical (which we confirm in the data). This is because workers that are fired from the bottom rungs of a given career path will optimally seek to find jobs that utilize a different skill set rather than re-applying to jobs, for which they are underqualified. In that sense, the two opposing forces shaping the cyclicality of mismatch are in fact both manifestations of the cleansing of under-qualified workers, which increases career mobility in recessions and in turn heightens mismatch among new hires.

Main results

1. This project contributes to an old debate on the cyclicality of worker–occupation mismatch. On the one hand, matching models with endogenous separations suggest that mismatch is procyclical due to a cleansing of unproductive matches. On the other hand, others have argued that mismatch is countercyclical due to various sullying forces. Our analysis provides a more nuanced view, suggesting that in fact both forces are present among different sets of workers, although the cleansing effect unambiguously dominates at the aggregate.

2. The framework is among the first that incorporates multidimensional sorting into an equilibrium model with labor market frictions. It is distinguished from the existing literature by its analytical tractability, which opens the door to an analysis of aggregate shocks. The framework delivers rich predictions regarding job and career mobility. The literature has used a random search model of the labor market, effectively accounting for skill mismatch by exogenous friction that prevents workers from applying to the best-fitting jobs. In contrast, our approach abstracts from such frictions by allowing the search to be directed and instead motivates skill mismatch using incomplete information.

3. The model has raised considerable inertia in mismatch and earnings, reflecting, on the one hand, the time needed to learn about any subsisting mismatch and, on the other hand, its slow dissolution due to search frictions. The inertia provides a novel narrative for the “scarring effect of unemployment which complements recent explanations. In line with empirical evidence, workers that are displaced from their careers suffer large and persistent earnings losses, even after they have been re-employed.

Conferences, seminars and workshops