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Péter Hudomiet

University of Michigan, Ann Arbor, USA

Author: Péter Hudomiet

Abstract: The unemployment rate among college graduates is substantially lower than among workers with lower levels of schooling. The duration of unemployment, however, is surprisingly similar across education groups in the US. This paper quantifies the role of one economic mechanism shown to be able to predict the observed symmetry in hiring rates and the large differential in layoff and unemployment rates: occupation specific adjustment costs leading to differential labor hoarding. Recent empirical studies found that the largest component of labor adjustment costs are “adaptation costs” due to the relatively low productivity of newly hired workers. It has also been found that adaptation takes longer in complex, skilled jobs, which are usually filled by highly educated workers. The effect of adaptation on unemployment and turnover is calibrated using a search and matching model with endogenous job creation and job destruction. For the calibration, empirical measures of adaptation costs are used from a US employer survey, the Multi-City Study of Urban Inequality. Adaptation costs explain around one third of the unemployment gap between college and high school graduates in the baseline specification. The role of adaptation costs can be larger if the autocorrelation in match specific productivity is smaller. The calibrated model also predicts a reasonable wage-tenure profile, and, consistently with data, it predicts higher equilibrium separation rates among recently hired workers. Business cycle implications of adaptation costs are discussed, as well as mechanisms that can explain the rest of the educational gap in unemployment.

JEL codes: E24, J24, J64

Full Text:  “The Role of Occupation Specific Adaptation Costs in Explaining the Educational Gap in Unemployment”