Loss of Skill and Labor Market Fluctuations

Etienne Lalé ()

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

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 spell.

Keywords: Diamond-Mortensen-Pissarides model; Labor market volatility; Skill loss (search for similar items in EconPapers)
JEL-codes: E24 E32 J24 J63 J64 (search for similar items in EconPapers)
Pages: 37 pages.
Date: 2015-11-17, Revised 2017-01-18
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.bristol.ac.uk/efm/media/workingpapers/w ... pdffiles/dp16668.pdf (application/pdf)

Related works:
Journal Article: Loss of skill and labor market fluctuations (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:15/668

Access Statistics for this paper

More papers in Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK
Bibliographic data for series maintained by Vicky Jackson ().