The underemployment trap

Jie Duan and Paul Jackson

Journal of Monetary Economics, 2025, vol. 155, issue C

Abstract: Many college graduates are underemployed, i.e., work in occupations that do not require a college degree. We document that underemployed workers are less likely to transition to a college occupation the longer they are underemployed and that longer underemployment histories are associated with lower wages in college occupations. To explain these findings, we develop a directed search model with unobserved heterogeneity, occupation-specific human capital, and on the job search. Workers are uncertain about their suitability for college jobs and learn through search. Underemployment is generated by search and information frictions, as workers with a low expected job finding probability in college occupations self-select into underemployment. Once underemployed, workers’ college occupation-specific human capital decays. A quantitative decomposition shows that unobserved heterogeneity explains most of the duration dependence in underemployment.

Keywords: Underemployment; Duration dependence; Unobserved heterogeneity; Human capital (search for similar items in EconPapers)
JEL-codes: E24 J24 J62 J64 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:155:y:2025:i:c:s0304393224000862

DOI: 10.1016/j.jmoneco.2024.103633

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