Educational Specific Decompositional Effects of Skill Loss on TFP (Link)
Abstract: This paper develops a model linking the structure of unemployment (durations, flows, composition) to TFP via skill loss. With homogeneous skill loss, unemployment affects TFP mainly via average unemployment duration determined by job-finding rates. Introducing heterogeneity in skill loss across educational groups creates two amplification channels—the intensive margin and the composition margin. As skills erode, some workers’ productivity approaches the value of non-market time, making firms’ vacancy-posting incentives more sensitive to aggregate shocks, while cross-group flow heterogeneity makes shocks shift the skill distribution, which in turn amplifies fluctuations in employment and TFP. When both margins operate simultaneously, their interaction generates a nonlinear amplification that exceeds the sum of their individual effects. Evidence from the PSID and CPS shows that skill loss is heterogeneous—faster for highly educated workers—and that periods with cyclically higher shares of educated unemployed coincide with lower aggregate TFP, providing direct evidence that unemployment’s structure transmits this heterogeneity to productivity.
Frictional Wage Dispersion over the Business Cycles (Link)
Abstract: This paper reconciles the behavior of wages over the business cycle with frictional wage dispersion within the search framework introduced by Hornstein et al. (2011). While their study focuses on steady-state wage dispersion, I show that the canonical matching model not only fails to capture the magnitude of wage dispersion, but I also demonstrate that it fails to explain the procyclical behavior observed in wage dispersion over the business cycle. Empirical evidence shows that the mean-min wage ratio(Mm ratio) is procyclical, consistent with the findings of Morin (2019). Additionally, I present the elasticity between business cycle indicators and wage dispersion, quantitatively reinforcing the procyclical nature of wage dispersion. To resolve this, I extend the canonical matching model by incorporating aggregate productivity that fluctuates with the business cycle. This extension lowers workers’ reservation productivity during economic expansions, leading to increased wage dispersion. Simulations demonstrate that the modified model successfully captures both the qualitative and quantitative patterns of wage dispersion, aligning closely with empirical data and offering a clearer understanding of wage dynamics during economic fluctuations.
Cyclical Skill Loss during Unemployment (Link)
Abstract: This paper empirically quantifies the skill loss during unemployment across different phases of the business cycle. The results suggest that the effect of unemployment duration on wages is about 40% larger in recessions than in expansions, and this pattern holds across skill groups. These findings have important implications for theoretical models of labor-market dynamics, particularly for volatility, frictional wage dispersion, and the cyclical nature of duration dependence. Accordingly, policy interventions may be more effective in recessions, when skill loss is more severe, with implications for counter-cyclical entrant-hiring policy and monetary policy.