Cyclical Upgrading of Labor and Employment Differences across Skill Groups

This paper examines the cyclical properties of employment rates in a search and matching model that features heterogeneous workers and jobs. Firms can create vacancies for jobs that that require either a high- or a low-skill level. High-skill workers are best suited for high-skill jobs, but are also qualified for low-skill jobs, whereas low-skill workers are only qualified for low-skill jobs. My analysis highlights the importance of a vertical type of transitory skill-mismatch, which takes the form workers accepting jobs below their skill level to escape unemployment and upgrading by on-the-job search, in explaining why typically employment is lower and more procyclical at lower skill levels. I show that this feature makes low-skill vacancy creation more strongly procyclical than high-skill vacancy creation. The model is also consistent with important features of the labor market, such as a procyclical rate of job-to-job transitions and evidence that the educational levels of new hires within occupations are higher in recessions and lower in booms.