The objective of this research is to better understand the determinants and consequences of unemployment. We will explore how shocks to industries and occupations affect the wages and unemployment rates of workers with different skills levels. In particular, we will explore the implications of the fact that individuals typically accumulate skills which are most applicable to the industries and occupations where they have worked. For unlucky workers, technological progress, adverse shifts in demand, and competition from international trade may reduce the demand for these skills. Moreover, older workers are less geographically mobile than younger workers. It follows that the skills of experienced workers are supplied inelastically and so adverse shocks will quickly lower these workers' wages. At some point, a worker may become unemployed rather than continue to work at a wage far below his historical level. In contrast, younger workers who have not accumulated specific skills and who are less tied to a geographic area are more likely to move. The risk of unemployment for skilled workers is exacerbated by labor unions, which may sustain high wages by creating a fringe of long-term unemployment among workers who are not allocated jobs.

Unemployment falls as workers move from the depressed to the expanding sectors of the economy, but this adjustment process may be very slow. Accumulating skills valuable in the expanding sectors can take many years, and earning seniority in the union of the expanding sector may also be a very slow process. Therefore older workers in a currently depressed sector may be willing to wait a long time for labor market conditions to improve in their existing occupation or industry, possibly retiring before they ever return to work. This lack of reallocation of skilled workers creates the prospect of years of low wages and high unemployment rates for such workers. The final goal of this project is to explore how policies can ameliorate the adverse consequences of these shocks while encouraging workers to move towards expanding sectors of the economy when appropriate.

Intellectual Merit: The PI and Co-PI propose a novel theory of unemployment. Building on techniques developed elsewhere in the economics literature, they will use analytically tractable models to examine the interaction between idiosyncratic shocks and the worker's specific human capital and seniority in the labor union. There has been relatively little work on the type of model that this project will investigate, in part because such models were previously viewed as intractable. Recent research by the PI and Co-PI has made progress on this issue. The techniques the PI and Co-PI plan to develop will also be useful for studying other economic environments where real options are important, such as the migration decision for low skilled workers, irreversible investment decisions, as well as some aspects of the housing market.

Broader Impacts: The lifetime incomes of most individuals are primarily determined by labor market outcomes: how capable the individuals are of accumulating human capital and how the price of that human capital fluctuates over time are important determinants of those outcomes. In addition, for a worker who is a member of a labor union, the demand for the services provided by that union and the mechanism by which the union assigns jobs to its members significantly affects her labor market outcomes. Although union membership has declined in importance in the U.S. for several decades, recent developments suggest that unionization rates have bottomed out and are now increasing. Thus the findings of this study should be relevant for policymakers and researchers studying labor markets in particular, and macroeconomics more generally. The techniques developed here are useful in other fields in economics that study real options, including investment and finance.

National Science Foundation (NSF)
Division of Social and Economic Sciences (SES)
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Georgia Kosmopoulou
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University of Chicago
United States
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