Paper by Ana Figueiredo published in the Journal of Political Economy

A novel narrative for the scarring effect of unemployment

In their paper, Ana Figueiredo (Erasmus School of Economics) and co-authors Isaac Baley (Universitat Pompeu Fabra) and Robert Ulbricht (Boston College) study the cyclical dynamics of skill mismatch and quantify its impact on labour productivity. They build a tractable directed search model, in which workers differ in skills along multiple dimensions and sort into jobs with heterogeneous skill requirements. Skill mismatch arises because of information frictions and is prolonged by search frictions. Estimated to the United States, the model replicates salient business cycle properties of mismatch. In particular, the authors find that in recessions skill mismatch decreases among ongoing working relationships but goes up among new hires. Job transitions in and out of bottom job rungs, combined with career mobility, are key to account for the empirical fit.

Understanding the frictions underlying labour market reallocation and their impact on the cyclicality of productivity and wages is key for informing the design of policies aimed at stabilising economic fluctuations (e.g., monetary policy, unemployment protection) as well as promoting long-run growth (e.g., retraining programs, structural labor market reforms).

According to Ana Figueiredo, the theoretical framework they have come up with also provides a new narrative for the 'scarring effect of unemployment' on wages: "In line with empirical evidence showing that earnings losses after job displacement are large and persistent, our model predicts that workers displaced from their careers suffer large and persistent earnings losses, even after they have been re-employed. This is because rebuilding a career in a new sector implies high levels of uncertainty, which slows down a worker’s climb through the job ladder."

About the Journal of Political Economy

The Journal of Political Economy is a top-rated peer-reviewed academic journal in economics. The journal publishes highly selective articles, both theoretical and empirical, in several areas, including monetary theory, fiscal policy, labor economics, development, microeconomic and macroeconomic theory, international trade and finance, industrial organization, and social economics.