Finance and Economics Discussion Series

Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability

Isabel Cairo and Tomaz Cajner
2014-09

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.

Keywords: Unemployment, education, on-the-job training, specific human capital