Unemployment Risk in a Lifecycle Earnings Model
Abstract: I analyze the extent to which lifecycle earnings dynamics can be explained by unemployment. Using a human capital model with general and career specific skills, I find that unemployment shocks plausibly explain the recently identified leptokurtosis in the earnings change distribution. Long unemployment spells – infrequent, but not rare – lead to large negative changes while returning from such spells accounts for large positive changes. Additionally, I show that the interaction between unemployment and career-specific skills can reproduce a seeming contradiction where college graduate's earnings exhibit high lifecycle dispersion but low year-to-year variation relative to those with less education.