March 2021

The Ways the Cookie Crumbles: Education and the Margins of Cyclical Adjustment in the Labor Market

Cynthia L. Doniger

Abstract:

I document that less educated workers experience higher and more cyclically sensitive job separation rates. Meanwhile, workers with a bachelor's degree or more exhibit pro-cyclical wages while workers without a high school degree exhibit no statistically discernible cyclical pattern. Differences in the sensitivity are most stark when measurement of labor costs accounts for the value of the persistent effects of current macroeconomic conditions on future remitted wages. These findings suggest optimally differential implementation of self-enforcing implicit wage contracts in which educated workers and their employers leverage relative employment stability to smooth the effects of cyclical fluctuations over longer horizons. This margin of adjustment is less available to the less well educated, who have shorter expected employment durations. Furthermore, failure to account for the heterogeneities documented here leads to substantial underestimation of the welfare costs of business cycles.

DOI: https://doi.org/10.17016/FEDS.2021.019

PDF: Full Paper

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Last Update: March 19, 2021