A Dynamic Model of Occupational Mobility, Structural Unemployment, Average Labour Productivity and Wage Dispersion

This paper presents a dynamic model of structural unemployment and occupational choice in which an economy is subjected to aggregate reallocation shocks and workers may choose to incur costs to retrain in order to move into occupations that pay higher wages. As it is costly for workers to retrain, workers may prefer to remain unemployed in occupations suffering through relatively low productivity states. Reallocation shocks, which change the relative labour productivity across occupations, drive variation in the distribution of workers across occupations. The general equilibrium model produces volatile unemployment and occupational mobility rates but also features (i) sign switches in the correlation between average labour productivity and unemployment rates across decades within sample runs, (ii) decades with negatively correlated unemployment and occupational mobility rates, and (iii) substantially large swings in the rate of occupational mobility that are strongly, positively correlated with measures of wage inequality.