Labor Market Sorting over the Business Cycle

study whether workers selectively separate from their job matches in a recession. Using data from the Current Population Survey, I show that workers with short tenure and high wages are more likely to lose their jobs and become unemployed in recession periods. Moreover, the weekly history of workers from National Longitudinal Surveys suggests that workers having an experience of separation into unemployment for more than four weeks have higher separation probabilities later in their career. Moreover, the gap in separation probabilities between workers with and without separation experience becomes wider in recessions, which suggests an abundance of workers with small expected match surplus, or high separation rates, in the unemployment pool in bad times. I then test whether selective separation at the onset of the recession affects the job creation decision of employers. Since vacant jobs are more likely to be matched with unemployed workers, cyclical variation in the composition of unemployed workers changes the expected return to post vacancies. I introduce workers heterogeneous of outside values into the Diamond-Mortensen-Pissarides model with endogenous separation to see the macroeconomic implications of worker sorting through employment status over the business cycle. The key mechanism is that the firms tend to separate from their low surplus employees more frequently during recessions, entrants take this into account, and they reduce the number of vacancies created. Although the composition change amplifies cyclical fluctuations in job-finding rates and unemployment rates, its quantitative importance is small, compared to underlying forces to create cyclical fluctuations