Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability

Abstract

Why do more educated workers experience lower unemployment rates and lower employment volatility? A closer look at the data reveals that these workers have similar job finding rates, but much lower and less volatile separation rates than their less educated peers. We argue that on-the-job training, being complementary to formal education, is the reason for this pattern. Using a search and matching model with endogenous separations, we show that investments in match-specific human capital reduce the outside option of workers, implying less incentives to separate. The model generates unemployment dynamics that are quantitatively consistent with the cross-sectional empirical patterns.

Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability

“…() . Moreover, these results are robust to the possible bias due to duration dependence and the inclusion of transitions in and out of the labour force (Cairó and Cajner, ).…”

“…Moreover, the textbook matching model also assumes proportionality of hiring costs to productivity (Pissarides, ). Nevertheless, in Cairó and Cajner () we perform the sensitivity analysis of the quantitative results with respect to different specification of vacancy posting cost and show that the results are robust to different parameterisations of the flow vacancy posting cost.…”

“…In our case, however, this leads to a distorting effect due to different means across education groups. For further discussion and volatility measures of the data expressed in natural logarithms, see Cairó and Cajner ().…”

The effect of modular education on school dropout

“…Analogous to the argument above, modular education may increase high school dropout and subsequently increase the probability of unemployment and employment instability (Li, 2006;Cairo & Cajner, 2018) and decrease the probability of receiving higher wages (Devereux & Hart, 2010;Dolton & Sandi, 2017). First, modular education may decrease students' labour market outcomes through its influence on high school dropout.…”

“…School dropout is believed to instigate various undesirable social outcomes such as crime (Merlo & Wolpin, 2015;Cook & Kang, 2016), teenage pregnancy (Black et al, 2008), unemployment and employment instability (Li, 2006;Cairo & Cajner, 2018), lower wages (Devereux & Hart, 2010;Dolton & Sandi, 2017), lower health (Groot & van den Brink, 2007), lower life expectancy and lower overall happiness (Oreopoulos, 2007;Oreopoulos & Salvanes, 2011). Similar social outcomes at the individual level may translate into a societal burden.…”