Human Capital Dynamics and the U.S. Labor Market

The high U.S. unemployment rate after the Great Recession is usually considered as a result of changes in factors influencing either the demand side or the supply side of the labor market. However, no matter what factors have caused the changes in the unemployment rate, these factors should have influenced workers’ and firms’ decisions. Therefore, it is important to take into account workers’ endogenous responses to changes in various factors when seeking to understand how these factors affect the unemployment rate. To address this issue, we estimate a Mortensen-Pissarides style labor-market matching model with endogenous separation decisions and stochastic changes in workers’ human capital. We study how agents’ endogenous choices vary with changes in the exogenous shocks and changes in labor-market policy in the context of human capital dynamics. There are four main findings. First, once workers have accounted for and are able to optimally ∗We are grateful for useful suggestions and comments from Yongsung Chang, Russell Cooper, Greg Kaplan, Ayse Imrohoroglu, Christopher Otrok, José-Vı́ctor Ŕıos-Rull, Richard Rogerson, Peter Rupert, Thomas J. Sargent, and the seminar and conference participants at the Federal Reserve Bank of Kansas City, the Midwest Macro Meeting, NYU Economics Alumni Conference, HKIMR, NUS, and the Society for Computational Economics for helpful comments and suggestions. We also thank Jing Yu and Lisa Taylor for great research assistance. The views expressed here are the opinions of the authors only and do not necessarily represent those of the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Kansas City, or the Federal Reserve System. †Economic Research Department, Federal Reserve Bank of Atlanta. Email: [email protected]. ‡Economic Research Department, Federal Reserve Bank of Kansas City. Email: [email protected].