The Effect of an Early Career Recession on Schooling and Lifetime Welfare

Abstract

This article evaluates the lifetime welfare and labor market consequences of experiencing a recession during youth, using a directed search equilibrium model with heterogeneous agents and aggregate shocks. In particular, the model allows for endogenous schooling decisions over the business cycles. The counterfactual analysis shows that experiencing the 1981–82 recession in youth causes a 1.6%–2.3% loss in lifetime welfare. Endogenizing the schooling decision avoids overestimation of welfare loss because of the selection effect and the human capital effect. I also decompose lifetime wage changes into different channels: changes from schooling, work experience, and job mobility.

Inventory Management in Decentralized Markets

“…First, we show that the transition probability matrix of inventory levels identifies the unobserved Poisson rates of matching in both markets at each inventory level $$\phi _r^*(x)\equiv \phi _r(\theta ^*(x)), \phi _w^*(x)\equiv \phi _w(\lambda ^*(x))$$, fully determining the pattern of dealers' inventory transition. Our approach resembles the standard approach in the labor search literature (see, e.g., Menzio and Shi, 2011 and Guo, 2018 where the state variable is workers' employment status). However, unlike the employment status that switches infrequently, an intermediary's state is the inventory level, which may increase or decrease quickly.…”

Directed Search and Competitive Search Equilibrium: A Guided Tour

“…Schaal (2017) also uses a directed search model to study business cycles, focusing on the impact of time-varying idiosyncratic shocks at the establishment level. Guo (2018) also uses directed search to study recessions in a model with endogenous schooling and heterogeneous agents.…”