Loss of Skill and Labor Market Fluctuations

26 Pages Posted: 16 Nov 2015 Last revised: 3 Aug 2018

See all articles by Etienne Lalé

Etienne Lalé

University of Quebec at Montreal (UQAM) - Université du Québec à Montréal; CIRANO; IZA

Date Written: January 1, 2017


In this paper, we examine how skill loss can contribute to aggregate labor market fluctuations in the Diamond-Mortensen-Pissarides model. We develop a computationally tractable stochastic version of that model wherein workers accumulate skills on the job and face a risk of skill loss after job destruction. We find that skill heterogeneity dampens the fluctuations of labor market variables, and that introducing skill loss offsets this effect and generates additional amplification. The main forces driving this result are pro-cyclical increases in the probability of skill loss during unemployment: these provide incentives to post proportionally more vacancies during upturns by raising the surplus from employing high-skill workers. Compositional changes in the unemployment pool, on the other hand, play a negligible role for empirically plausible rates of skill depreciation, which imply a relatively slow process compared to the duration of unemployment spells.

Keywords: Diamond-Mortensen-Pissarides model, Labor market volatility, Skill loss

JEL Classification: E24, E32, J24, J63, J64

Suggested Citation

Lalé, Etienne, Loss of Skill and Labor Market Fluctuations (January 1, 2017). Labour Economics, 50(C), March 2018, Pages 20-31.. Available at SSRN: https://ssrn.com/abstract=2691273 or http://dx.doi.org/10.2139/ssrn.2691273

Etienne Lalé (Contact Author)

University of Quebec at Montreal (UQAM) - Université du Québec à Montréal ( email )

CP 8888 Succ Centre Ville
Montréal, Québec H3C3P8

CIRANO ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec

IZA ( email )

P.O. Box 7240
Bonn, D-53072

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