Skills, Occupations, and the Allocation of Talent over the Business Cycle

Business cycles have heterogeneous effects in the labor market. Workers with different characteristics and skills are not equally affected by the cyclical swings in the demand for labor of different occupations. This paper studies the employment and occupational decisions of workers with heterogeneous skill portfolios and how business cycle conditions affect the patterns of sorting of workers into occupations, the accumulation of skills, and earnings. For this I develop and estimate a dynamic general equilibrium Roy (1951) model with aggregate shocks and propose a new method to characterize the solution recursively. The estimation shows that workers’ comparative advantage strongly influence their occupational choices, but changes in business cycle conditions affect the sorting of workers into occupations and can have long lasting effect in the accumulation of skills. The model is able to capture the direction and cyclical patterns of occupational switching. I compute measures of the missallocation of talent and labor productivity losses from recessions.