Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability

Why do more educated workers experience lower unemployment rates? A closer look at the data reveals that these workers have the same job finding rates, but much lower separation rates than their less educated colleagues. We argue that on-the-job training, being complementary to formal education, is the reason for this pattern. Using a search and matching model with endogenous separations, we show that investments in match-specific human capital reduce the outside option of workers, implying less incentives to separate and thus longer job spells. The model generates unemployment dynamics that are consistent with the observed patterns for unemployment, separation and job finding rates across education groups.