What Should I Be When I Grow Up? Occupations and Employment over the Life Cycle and Business Cycle

Why is unemployment higher for young individuals than for the old? Why are business cycle fluctuations in employment more pronounced for the young than for the old? We address these questions in the context of a search-and-matching model of the labor market that features learning about occupational fit. Specifically, young workers enter the labor market not knowing the occupation they are most productive in, i.e., not knowing their ``true calling'' in life. In order to learn her true calling, a worker must sample occupational matches over her career. Matches are subject to both idiosyncratic and aggregate shocks, so that workers move in and out of unemployment. As such, our model generates heterogeneity in the labor force, where employed and unemployed workers can be categorized into types: lower type workers have little information about their true calling, while higher types are closer to discovering it. Hence, the model generates an endogenous mapping between `type' and age, allowing us to address our unemployment facts. Young workers are more likely to be unemployed since they are more likely to be in transition between occupations. This generates age differences in unemployment levels. Young workers are more volatile over the business cycle since firms' returns to posting vacancies for low types is more sensitive to fluctuations in aggregate productivity. This generates age differences in employment volatility.