The Welfare Costs of Skill-Mismatch Employment

David Arseneau and Brendan Epstein

No 2014-42, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Skill-mismatch employment occurs when high-skilled individuals accept employment in jobs for which they are over-qualified. These employment relationships can be beneficial because they allow high-skilled individuals to more rapidly transition out of unemployment. They come at the cost, however, in the form of lower wage compensation. Moreover, an externality arises as high-skilled individuals do not take into account the effect that their search activity in the market for low-tech jobs has on low-skilled individuals. This paper presents a tractable general equilibrium model featuring mismatch employment and on-the-job search to articulate these tradeoffs. We derive a set of efficiency conditions that describe the labor market distortions associated with these two model features and illustrate how they alter the standard notion of the labor wedges inherent in general equilibrium search models. Finally, we calibrate the model to U.S. data and show that the distortions associated with mismatch employment are largely distributional and can be quantitatively large.

Keywords: Job-to-job transitions; labor market frictions; skill premium (search for similar items in EconPapers)
Pages: 41 pages
Date: 2014-06-02
New Economics Papers: this item is included in nep-dge and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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