WPEG Annual Conference 2021
Abstract
This paper looks at the intersection of labour market frictions, mismatch and individual unobserved heterogeneity. A model, allowing for heterogeneous workers and firms, shows that job search frictions generate mismatch between employees and employers. In a continuous skills setting, higher-skilled workers, who face more frictions, have a lower expected wage. Predictions of the model motivate a novel multi-component indicator of mismatch; employees fail any match if their skills exceed the median estimates of the more skills-demanding occupation. In the empirical analysis, BHPS/UKHLS and BCS70 data are employed to illustrate the extent of this inefficiency in the British labour market. Results show that (i) the magnitude of the mismatch increases after the Great Recession. (ii) Changes between the matching status take place due to workers’ occupational mobility and over-time skills development. (iii) Employees can find better jobs or their mobility occurs earlier than the aggregate change of skills. (iv) Controlling for skills, measured by the cognitive and non-cognitive skill test scores throughout childhood, I find that unobserved productivity does not generate mismatch in the market.
