The labour market: details matter

In this paper, I introduce labour market mechanisms used in partial equilibrium models, microdata econometric studies, and research in psychology and sociology to an agent-based macroeconomic model. These mechanisms include skill-based worker switching, skill loss during unemployment, and the skill-dependence of wages. I show that when a large supply shock occurs, these complexities prevent GDP from fully recovering, at least in the medium term: the GDP gap between the shock and no-shock scenarios persists even five years after the shock, whereas no such difference is observed in the baseline model. I also show that the aggregate modelling shock affects different industries differently, and this effect is statistically significant depending on the level of skills required in a given industry. Finally, I demonstrate that training programmes for new workers in just the two most affected industries have a comparable impact to training a much larger number of workers with no industry-specific constraints.