Comparative advantage and unemployment

Abstract

We model unemployment allowing workers to di¤er by comparative advantage in market work. Workers with comparative advantage are identi…ed by who works more hours when employed. This enables us to test the model by grouping workers based on their long-term wages and hours from panel data. The model captures the greater cyclicality of employment for workers with low comparative advantage. But the model fails to explain the magnitude of countercyclical separations for high-wage workers or the magnitude of procyclical …ndings for high-hours workers. As a result, it only captures the cyclicality of the extensive, employment margin for low-wage, low-hours workers.We thank Evgenia Dechter for her excellent research assistance. We particularly thank Mark Aguiar and Valerie Ramey for their helpful suggestions.

Screening and Labor Market Flows in a Model with Heterogeneous Workers

“…The middle left panel of Figure 5 shows that the log‐increase in the unemployed share of low‐efficiency workers peaks at 6%, or about a third of its increase in the EU case, limiting the relevance of the composition effect for unemployment volatility. Low‐efficiency workers experience a pronounced fall in average hours relative to high‐efficiency workers in both the EU and U.S. cases, a result consistent with the empirical evidence in Bils, Chang, and Kim (2009) and Hines, Hoynes, and Krueger (2001) that an important fraction of the fall in wage earnings for workers with below‐average wages during a recession comes from a fall in hours worked.…”

“…However, our model can match his evidence on the procyclicality of wages for workers flowing into the pool of unemployed, since it implies that in the beginning of a recession the productivity of low‐efficiency workers entering unemployment is higher than average, and the average wage for unemployment entrants does not need to fall. Bils, Chang, and Kim (2009) find results opposite to Mueller using U.S. Survey of Income and Program Participation (SIPP) data. They conclude that low‐wage, low‐hours workers (which they identify with workers having a low comparative advantage on the labor market in comparison to nonmarket activities) have separation and job‐finding rates substantially more sensitive to the business cycle than high‐wage, high‐hours workers.…”

“…Contrary to their model, we assume a portion of the match productivity is worker‐specific rather than match‐specific. Bils, Chang, and Kim (2009) and Mueller (2011) study the implications of heterogeneity in worker productivity for wages and labor market flows over the business cycle, but they assume segmented labor markets and only consider aggregate productivity shocks.…”

Business Cycles in the Equilibrium Model of Labor Market Search and Self‐insurance*

“…They do not have heterogeneity in terms of individual productivity of workers. In other words, the version of the model developed here without the labor‐leisure choice and heterogeneous productivity of workers is similar to their model 3 Bils et al. (2009).…”

“…More recently, Krusell et al. (2010), Bils et al. (2009), and Shao and Silos (2007) construct models that feature saving, incomplete markets, and labor market frictions as in the current article.…”