Human Capital and Unemployment

The paper explores the interaction between sector-specific human capital accumulation and sector-specific productivity or demand shocks. Our objective is to better understand the determinants of skill and experience premia, the costs of displacement for workers with long job tenure, and the nature of unemployment among such workers. For example, our model suggests why skilled workers can remain unemployed indefinitely even though low wage jobs are readily available and are acceptable to unskilled workers. We develop a version of the Lucas-Prescott (1974) search model with sector-specific human capital. Competitive firms in each sector hire skilled and unskilled workers to produce an intermediate good. The intermediate goods produced in different sectors are combined by a competitive final goods producer to generate a consumption good using a constant returns to scale technology. Unskilled workers are free to work in any sector, while skilled workers have sector-specific human capital, although they can always leave the sector to become unskilled. Skills are accumulated while working in a sector, with an unskilled worker becoming skilled at a constant rate. Finally, sectoral productivity is continuously buffeted by idiosyncratic shocks, inducing the reallocation of workers across sectors.