Efficiency and Labor Market Dynamics in a Model of Labor Selection

We characterize efficient allocations and cyclical fluctuations in a labor selection model. Potential new hires are heterogenous in the cross-section in their degree of training costs. In a calibrated version of the model that identifies costly selection with micro-level data on training costs, efficient fluctuations feature highly volatile unemployment and hiring rates, in line with empirical evidence. We show analytically in a partial equilibrium version of the model that volatility arises from selection effects, rather than general equilibrium effects.