Separations, Sorting and Cyclical Unemployment

This paper establishes a new fact about the compositional changes in the pool of unemployed over the U.S. business cycle. Using micro-data from the Current Population Survey for the years 1962-2012, it documents that in recessions the pool of unemployed shifts towards workers with high wages in their previous job. These shifts are associated with both observed and unobserved factors in the wage and are mainly driven by the high cyclicality of separations of high-wage workers. The paper evaluates a number of theories that can potentially account for this new fact about the composition of the unemployed. ∗I am grateful to Per Krusell, John Hassler, Torsten Persson, Alan B. Krueger, Mark Aguiar, Dale Mortensen, Jonathan Parker, Mark Bils, Yongsung Chang, Erik Hurst, Thijs van Rens, Fabrizio Zilibotti, Pascal Michaillat, Aysegul Sahin, Mike Elsby, Almut Balleer, Phillippe Aghion, Valerie A. Ramey, Toshihiko Mukoyama, Pierre Yared, Emi Nakamura, Jon Steinsson, Gueorgui Kambourov, Guillermo Ordonez, Steinar Holden, Tobias Broer, Ethan Kaplan, Mirko Abbritti, Shon Ferguson, David von Below, Erik Meyersson, Daniel Spiro, Ronny Freier, Kimberly Varadi and participants at seminars at Columbia GSB, Northwestern University, the University of Edinburgh, the Federal Reserve Bank of Richmond, the Federal Reserve Bank of New York, the University of Western Ontario, Toulouse School of Economics, Aarhus University, the University of Essex, the University of Southampton, the University of Lausanne, McGill University, University of Montreal, the Bank of England, the NordMac symposium 2010 and the Econometric Society European Winter Meeting for very helpful comments and ideas, and to Handelsbanken’s Research Foundations and the Mannerfelt Foundation for financial support. †Affi liations: Columbia University, NBER and IZA. Mailing address: Columbia Business School, Columbia University, Uris Hall, 3022 Broadway, New York, NY 10027. E-mail: [email protected].