Comparative advantage and unemployment

Abstract

Worker heterogeneity in productivity and labor supply is introduced into a matching model. Workers who earn high wages and work high-hours are identified as those with strong market comparative advantage high rents from being employed. The model is calibrated to match separation, job finding, and employment in the SIPP data. The model predicts a big drop in employment for workers with weak comparative advantage during recessions. But the data show that workers with strong comparative advantage also display sizable employment fluctuations, implying that aggregate employment fluctuations are not explained by the responses of workers with small rents to employment. (C) 2012 Elsevier B.V. All rights reserved.