Skill mismatch in the labour market
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Date
2016-12-02
Authors
Chen, Yu
Advisor
Gonzalez, Francisco M.
Gonzalez, Francisco M.
Gonzalez, Francisco M.
Journal Title
Journal ISSN
Volume Title
Publisher
University of Waterloo
Abstract
This thesis contains three chapters on skill mismatch in the labour market.
Chapter 1 provides a theory of ex ante skill mismatch, which we define as a situation
where firms create jobs that workers search for and accept, even though they do not make
the most productive use of their skills. The core idea is that, in the presence of asymmetric
information about workers' outside options, the value of on the job search is higher for workers
employed in such jobs. The theory provides new insights into the returns to education
as well as the impact of on the job search on labour market mismatch. It also provides an
explanation for the declining fortunes of educated American workers in recent decades.
Chapter 2 studies a competitive search equilibrium with exogenous skill mismatch, where
educated workers apply to routine jobs only if they face a high cost searching for cognitive
jobs. The purpose is to examine whether a simple model with exogenous mismatch can
explain the adverse labour market outcomes of educated workers. Under a negative shock
to routine jobs, the model fails to generate a fall in the employment rate together with a
decline in the job-to-job transition rate. Compared to endogenous mismatch equilibrium, an
equilibrium with exogenous mismatch does not incorporate the trade-o between job finding
rates and wages when unemployed workers choose to search in different job sectors. The
comparison suggests that understanding the mechanism of skill mismatch is essential to understanding
the labour market outcomes of educated workers.
Chapter 3 shows that displacement of high-school workers from routine jobs can be understood
as the labour-market response to an adverse selection problem. The adverse selection
problem arises because employment contracts do not systematically discriminate against education,
even though over-qualified ed workers are relatively more likely to quit routine jobs.
The labour market equilibrium distorts the labour market outcomes of high school graduates
by in efficiently increasing their wage at the expense of higher unemployment rate, in order to
separate them from overqualified ed college graduates. In addition, the labour market response
to the adverse selection problem creates a demand for post-secondary vocational education,
which is valuable because it acts as an entry barrier that prevents college graduates from
using routine jobs as stepping-stones towards better jobs.