A Life Cycle Model of Trans-Atlantic Employment Experiences

To understand trans-Atlantic employment experiences in the post-World War II era, we enrich the environment of Ljungqvist and Sargent (2008) in ways that allow skill losses occasioned by involuntary job separations (`turbulence') to have further effects on labor market outcomes. Our model features ex ante heterogeneity by having two types of workers who differ in their skill acquisition technologies. These technologies shape workers' long-run career decisions while search frictions in the labor market affect short-run employment outcomes. The model emphasizes labor supply responses near the beginning and end of life and whether early retirements are financed by an individual's savings or by public benefit programs. Increases in minimum wages in Europe explain why youth unemployment has risen more in Europe than in the U.S. Higher turbulence causes long-term unemployment to erupt in Europe, mostly among older workers, but leaves U.S. unemployment unaffected. Increased probabilities of skill losses at times of involuntary job separation interact with workers' subsequent decisions to invest in human capital in ways that generate age-dependent increases in autocovariances of income shocks like those observed by Moffitt and Gottschalk (1995).