Skill and Luck in the Theory of Turnover

Abstract

This paper investigates the joint implications of search and matching frictions in labor markets for wage inequality, and quanti es the average amount and the distribution of speci c job-matching capital, vulnerable to exogenous job destruction. Workers di®er both ex-ante in their average individual productivity (skill) and expost in their luck when matching with employers, learn over time the quality of the match, bargain on a wage, and search on and o® the job for new employers. Conditional on skills, learning and selection map gaussian output noise into an equilibrium stationary and ergodic wage distribution which is unimodal and right-skewed, with a Paretian right tail. When parameterized to match observed aggregate worker °ows, the model accurately predicts the observed wage loss following job destruction and hazard rates of separation as a function of tenure. The average amount of matching capital, vulnerable to job destruction, is then quanti ed at over a year worth of wages. Across skills, more able workers are more willing to tolerate mismatch to avoid unemployment; hence on average they experience a longer tenure, a more pronounced within-skill wage dispersion, a lower relative wage and welfare loss from displacement, a lower entry rate into unemployment and unemployment rate, higher job-to-job quitting rates with associated larger wage raises. Less skilled workers are dismissed earlier and then need to try more jobs or to get luckier to stay employed.