Jobless Recoveries and Skill-Biased Sectoral Shift

(ProQuest: ... denotes formulae omitted.)I. IntroductionEmployment recovery in the U.S. has been painfully slow after each post-1990 recession, and high unemployment persists long after the rebound of total output. This phenomenon is called "jobless recovery," which this study aims to investigate from a sectoral perspective using both empirical evidence and a structural model.First, I establish two stylized facts using the Integrated Public Use Microdata Series-Current Population Survey (IPUMS-CPS), which states that (1) in contrast to the goods sector, college workers have predominated in the service sector workforce since 1990; and (2) skill premium has increased faster in the service sector than in the goods sector. Fact 1 suggests that more skilled workers have managed to join the service sector, whereas Fact 2 suggests that the employment of skilled workers has made the service sector more productive than the goods sector. I define these facts as a skill-biased sectoral shift (SBSS), which prevents those laid-off unskilled workers in the goods sector from relocating to the service sector. Thus, unemployed workers from the goods sector take a longer time to find jobs, thereby delaying the recovery of aggregate employment.Second, I build a two-sector model to generate a jobless recovery by considering the stylized facts. Particularly, the baseline model has a zero labor adjustment cost and is only subject to an aggregate productivity shock. The SBSS is then incorporated into the baseline model via two elements. Fact 1 implies that the increasing educational barrier has also increased the costs for unemployed workers from the goods sector to find jobs in the service sector. Therefore, the first element is a sector-specific labor adjustment cost. Fact 2 implies higher productivity gains from hiring skilled labor in the service sector than in the goods sector. Therefore, the second element is a reallocation shock that makes productivity higher in the service sector than in the goods sector while keeping aggregate productivity intact. The baseline model is calibrated using post-1990 data. The SBSS-embedded model adopts the baseline calibration, thereby making SBSS the sole differentiating factor. The simulation shows a jobless recovery only in the SBSS-embedded economy.To generate a jobless recovery, a model needs a mechanism that decouples the movements of output and employment. Such mechanism is achieved by the combination of reallocation shock and adjustment cost. The reallocation shock makes labor more productive in the service sector than in the goods sector, in which the output and employment are increased in the former and reduced in the latter. In the calibrated model, the service sector has a bigger production share of total output than the goods sector. Therefore, the increase in the output of the service sector overwhelms the decrease in the output of the goods sector, after which the total output increases. Given that the adjustment cost hinders labor from moving from the goods sector to the service sector, the decrease in employment in the goods sector overwhelms the increase in employment in the service sector, after which the aggregate employment decreases. As a result, an increase in the total output is accompanied by a decrease in the aggregate employment.The rest of this paper is organized as follows. Section II relates this study to the existing literature. Section III provides empirical evidence on jobless recoveries and SBSS. Section IV outlines the two-sector model. Section V details the calibration, and Section VI describes the simulation results. Section VII discusses some implications of the model and presents empirical evidence to support the sectoral explanation. Section VIII concludes.II. Related LiteratureLinking sectoral shifts to the cyclicality of the aggregate labor market is not a novel approach (Lilien 1982; Abraham, and Katz 1986). Recessions tend to hit the goods sectors harder than the service sectors and result in higher unemployment in the former. …