High Youth Unemployment Volatility: A Risk-based Explanation

Abstract

We quantitatively analyze a heterogenous agent equilibrium model of search and matching in the presence of persistent aggregate shocks. In our model, employers learn about an unobservable component to a worker's productivity from performance. Our model makes two predictions. First, we show that accounting for realistic variation in discount rates is important to generate the quantitatively large differences in employment dynamics between young and old workers in the data. Second, our model predicts that a higher sensitivity of the unemployment rate of young workers in high beta industries compared to low beta industries. We test this cross-sectional prediction and find support for it in the data.