Economic Downturns and the Unemployed: More or Fewer Lemons?
30 Pages Posted: 9 Aug 2023
Date Written: August 6, 2023
How do economic downturns impact the skill composition of unemployed workers? Since screening is imperfect, this question is fundamental for firms that are considering posting vacancies. Thus, numerous papers have studied this topic theoretically and empirically; however, with contradicting results. To reconcile this division, we provide a tractable framework to understand (i) what factors drive the skill composition of unemployed workers and (ii) how productivity shocks affect those drivers. To provide a comprehensive analysis, we allow for productivity shock changes in both the frequency and the severity. We find that changes in either dimension induce effects that have opposite directions, making the net change of the average skill of an unemployed worker ambiguous. Moreover, we characterize the circumstances under which the net impact is positive or negative.
Keywords: Employment, cycles; layoffs, unemployment
JEL Classification: E24, E32, J63, J64
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