Experience, skill composition, and the persistence of unemployment fluctuations

Abstract

There is little internal propagation of unemployment in standard search and matching models. When calibrated to the high levels of worker flows observed empirically, unemployment in these models rapidly converges back to its steady state level. We illustrate that even with high worker flows between employment and unemployment, slow movements in the composition of workers across groups with different baseline unemployment rates can generate substantial persistence. To quantitatively assess the importance of these compositional changes, we develop a search model with worker experience and skill loss. When the model is calibrated to match empirical evidence on labor market outcomes that vary with tenure and worker displacement, the model endogenously generates substantial persistence in unemployment.