Skill Mismatch and Structural Unemployment | 2015

To study the effect of structural change on labor markets, I build a model in which structural change creates a mismatch between novel jobs skill requirements and workers' current skills. When the mismatch is severe, labor markets go through a prolonged adjustment process wherein unemployment is amplified and job creation is low. Due to matching frictions, firms find fewer workers with the requisite skills for novel jobs and they respond by creating fewer jobs. The paucity of novel jobs creates an external amplification effect that increases unemployment for all workers---including those who already hold the requisite skills---and discourages rapid skill acquisition by workers. Structural change is not only a secular process; it also interacts with the business cycle, causing a large and long-lasting increase in unemployment that concentrates in recessions. I demonstrate that the decline in routine-cognitive jobs outside manufacturing---a pervasive structural change that has affected U.S. labor markets since 2000---caused a severe skill mismatch that contributed to the long-lasting increase in unemployment observed during the Great Recession. My evidence suggests that this external amplification effect is important. Moreover, I find that the skill mismatch amplified and propagated demand shocks at the local labor market level.