Loss of skill and labor market fluctuations

an article by Etienne Lalé (University of Bristol, UK; IZA, Germany) published in Labour Economics Volume 50 (March 2018)

Highlights

• We build a stochastic search-matching model with skill accumulation and skill loss.
• Agents have perfect foresight over the dynamics of the cross-sectional skill distribution.
• Skill heterogeneity dampens the fluctuations of labor market variables.
• Pro-cyclical increases in the rate of skill loss amplify labor market fluctuations.
• Compositional changes in the unemployment pool play little role in these results.

Abstract

In this paper, we examine how skill loss can contribute to aggregate labor market fluctuations in the Diamond-Mortensen-Pissarides model. We develop a computationally tractable stochastic version of that model wherein workers accumulate skills on the job and face a risk of skill loss after job destruction.

We find that skill heterogeneity dampens the fluctuations of labor market variables, and that introducing skill loss offsets this effect and generates additional amplification.

The main forces driving this result are pro-cyclical increases in the probability of skill loss during unemployment: these provide incentives to post proportionally more vacancies during upturns by raising the surplus from employing high-skill workers.

Compositional changes in the unemployment pool, on the other hand, play a negligible role for empirically plausible rates of skill depreciation, which imply a relatively slow process compared to the duration of unemployment spells.

JEL classification: E24, E32, J24, J63, J64

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Earnings and labour market volatility in Britain

a research paper No. 2013-10 by Lorenzo Cappellari (Università Cattolica, Milano, and IZA) and Stephen P. Jenkins (London School of Economics, University of Essex, and IZA) published by Institute for Social and Economic Research (July 2013)

Abstract

We provide new evidence about earnings and labour market volatility in Britain over the period 1992–2008, and for women as well as men. (Most research about volatility refers to earnings volatility for US men.)

We show that earnings volatility declined slightly for both men and women over the period but the changes are not statistically significant. When we look at labour market volatility, i.e. including in the calculations individuals with zero earnings as well as employees with positive earnings, there is a marked and statistically significant decline for both women and men, with the fall greater for men.

Using variance decompositions, we show that the fall in labour market volatility is largely accounted for by changes in employment attachment rates. Labour market volatility trends in Britain, and what contributes to them, differ from their US counterparts in several respects.

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