Comparative Advantage in Cyclical Unemployment

Comparative Advantage in Cyclical Unemployment

We introduce worker differences in labor supply, reflecting differences in skills and assets, into a model of separations, matching, and unemployment over the business cycle. Separating from employment when unemployment duration is long is particularly costly for workers with high labor supply (low reservation wages). This predicts that workers with low labor supply will sort into the unemployment pool during recessions. This lowers the value of vacancies during recessions–low labor supply workers generate lower rents to employers– and exacerbates the cyclicality of vacancies and unemployment. We examine employment separations and wage cyclicality over the past twenty years for workers in the Survey of Income and Program Participation (SIPP). Separations are noticeably more countercyclical for workers who tend to work less. This pattern is mirrored in wage cyclicality; wages are less procyclical for those who work less.