Unemployment and Endogenous Reallocation over the Business Cycle

TL;DR

This paper investigates how occupational mobility influences unemployment patterns over the business cycle, using a multi-sector model to explain observed labor market dynamics and their cyclical behavior.

Contribution

It introduces a multi-sector business cycle model with heterogenous agents that captures occupational mobility's role in unemployment fluctuations.

Findings

Occupational mobility is procyclical and influences unemployment duration.

The model reproduces key features of US labor market cyclicality.

Occupational mobility driven by changing career prospects interacts with aggregate conditions.

Abstract

This paper studies the extent to which the cyclicality of occupational mobility shapes that of aggregate unemployment and its duration distribution. We document the relation between workers' occupational mobility and unemployment duration over the long run and business cycle. To interpret this evidence, we develop a multi-sector business cycle model with heterogenous agents. The model is quantitatively consistent with several important features of the US labor market: procyclical gross and countercyclical net occupational mobility, the large volatility of unemployment and the cyclical properties of the unemployment duration distribution, among many others. Our analysis shows that occupational mobility due to workers; changing career prospects, and not occupation-wide differences, interacts with aggregate conditions to drive the fluctuations of the unemployment duration distribution and the aggregate unemployment rate.