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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability
Isabel Cairo
Tomaz Cajner
Abstract

Why do more educated workers experience lower unemployment rates and lower employment volatility? A closer look at the data reveals that these workers have similar job finding rates, but much lower and less volatile separation rates than their less educated peers. 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. The model generates unemployment dynamics that are quantitatively consistent with the cross-sectional empirical patterns.


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Isabel Cairo & Tomaz Cajner, Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2014-9, 01 Nov 2013.
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Keywords: Unemployment; education; on-the-job training; specific human capital
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