Under-employment and the Trickle-Down of Unemployment
- American Economic Journal: Macroeconomics (Forthcoming)
A substantial fraction of workers are under-employed, i.e., employed in jobs for which they are over-qualified, and that fraction—the under-employment rate—is higher in recessions. To explain these facts, we build a search model with an endogenous “ranking” mechanism, in which high-skill applicants are systematically hired over less-skilled competing applicants. Some high-skill workers become under-employed in order to escape the competition for high-skill jobs and find a job more rapidly at the expense of less-skilled workers. Quantitatively, the model can capture the key characteristics of under-employment, notably the facts that both the under-employment rate and the wage loss associated with becoming under-employed increase in recessions.
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