Working Paper No. 11-44/r Declining Labor Turnover and Turbulence

The purpose of this paper is to identify possible sources of the secular decline in the aggregate job separation rate over the last three decades. First, I show that aging of the labor force alone cannot account for the entire decline. To explore other sources, I use a simple labor matching model with two types of workers, experienced and inexperienced, where the former type faces a risk of skill obsolescence during unemployment. When the skill depreciation occurs, the worker is required to restart his career and thus suffers a drop in his wage. I show that a higher skill depreciation risk results in a lower aggregate separation rate and smaller wage losses. The key mechanisms are that the experienced workers accept lower wages in exchange for keeping the job and that the reluctance to separate from the job produces a larger mass of low-quality matches. I also present empirical evidence consistent with this prediction. JEL codes: E24, J31, J64