The economic and social effects of skill mismatch in China: A DSGE model with skill and firm heterogeneity

Abstract

This paper examines the economic and social effects of skill mismatch by analyzing its impacts on the diffusion channels of skilled labor market search and matching efficiency shock. By presenting and estimating an NK-DSGE model using the macro-data from China, we find that skill mismatch reduces the unemployment of skilled labor by exerting a significant “crowding out” effect on the employment of unskilled labor. The resulting distortion of human resource allocation has widened the income and consumption gap between groups. We also consider the possibility of skill degradation induced by skill mismatch, which reduces the welfare loss of skilled labor at the cost of welfare deterioration of the unskilled. Both skill mismatch and skill degradation weaken the industrial structure by aggravating the labor shortage of high-tech enterprises. These findings imply that China's labor market reform should aim to alleviate skill mismatch and degradation.