Unemployment and endogenous reallocation over the business cycle

What is this research about and why did you do it?

Our research investigates whether the occupational mobility of workers contributes to changes in unemployment between recessions and expansions. A key motivation is the observation that occupational mobility is an important part of unemployed workers' job finding process. For example, on average 44% of workers who went through a spell of unemployment changed occupations at reemployment. These occupation movers also take longer to find a job and contribute to the changes in long-term unemployment between recessions and economic expansions. This suggests that the willingness and ability of individuals to move across different sectors can have important consequences for labour market fluctuations.

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How did you answer this question?

We first documented new evidence showing that the probability of an occupational change increases with unemployment duration, and this relationship decreases in recessions. We then propose a theoretical framework to analyse this evidence. The fundamental idea is that for many changing careers remains a difficult decision: do they wait for jobs to reappear in their previous occupations, risking long periods of unemployment? Or do they accept available jobs, even if they lose their occupation-specific skills which potentially means less job stability and lower earnings? We finally confront our framework to empirical evidence using modern econometric techniques based on computer simulations.

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What did you find?

Changes in unemployment between recessions and expansions are driven by workers desire to “wait” for labour market conditions in their previous occupations to improve, instead of looking for jobs in new occupations.  This is driven by workers giving more importance to their future career prospects than to occupation-wide conditions. Workers’ desire to “wait” implies that the nature of unemployment changes over the business cycle. Workers transit between periods of search and wait unemployment during their unemployment spell. However, wait unemployment becomes relative more prominent in recessions and search unemployment in expansions. These changes explain why we observe large fluctuations in unemployment over time.

Model simulations across non-routine(NR)/routine(R)cognitive(C) and manual(M) occupations

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What implications does this have for the study (research and teaching) of wealth concentration or economic inequality?

Our study implies that it might not be desirable for public policy to encourage worker reallocation across occupations as this might generate “low-pay-no-pay cycles” among a significant group of the population. With a backdrop of mostly stagnant wages, encouraging further reallocation to low-pay sectors could worsen livelihoods. Instead, retraining policies, although more costly to implement and longer to take effect, can have a long-term impact in reducing economics inequality.

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What are the next steps in your agenda?

This work has motivated three lines of work. Improve the measurement of occupational change. Investigate the impact of occupational change for earnings growth over the business cycle. Develop surveys to understand the barriers workers face when targeting different occupations.

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Citation

This paper can be cited as follows: Carrillo-Tudela, C., and Visschers, L. (2023). 'Unemployment and Endogenous Reallocation Over the Business Cycle'. Econometrica. 91(3); pp. 1119-1153.