Declining Labor Turnover and Turbulence
Federal Reserve Bank of Philadelphia
September 1, 2011
FRB of Philadelphia Working Paper No. 11-44
The purpose of this paper is to identify possible sources of the secular decline in the aggregate job separation rate over the last three decades. The author first shows that aging of the labor force alone cannot account for the entire decline. To explore other sources, he uses a simple labor matching model with two types of workers, experienced and inexperienced, where the former type faces a risk of skill obsolescence during unemployment. When the skill depreciation occurs, the worker is required to restart his career and thus suffers a drop in earnings. The author shows that a higher skill depreciation risk results in a lower aggregate separation rate and a smaller earnings loss. The key mechanisms are that the experienced workers accept lower wages in exchange for keeping the job and that the reluctance to separate from the job produces a larger mass of low-quality matches. He also presents empirical evidence consistent with these predictions.
Keywords: Separation Rate, Earnings Losses, Turbulence
JEL Classification: E24, J31, J64
Date posted: September 30, 2011 ; Last revised: August 7, 2015