Labor Market Selection and the Dynamics of a Recovery

Lukas Mann

Journal of Political Economy Macroeconomics, 2026, vol. 4, issue 3, 467 - 512

Abstract: This paper explores the role of selection in shaping the dynamics of unemployment during recoveries. A matching model with many-to-many matching and permanent worker heterogeneity delivers such selection and generates recovery unemployment dynamics that mirror the data closely. In line with empirical evidence, the model predicts that, during a recession, firms become more selective and job finding rates decline more for less productive, unemployed workers. This reinforces negative composition effects and creates a feedback loop, which slows down the recovery. I find empirical support for the cyclicality of job seeker quality implied by the model in data from the NLSY.

Date: 2026
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