Research

This paper studies how promotions and unemployment shape labor-market sorting and wages. Using the 1979 National Longitudinal Survey of Youth (NLSY79), I show that promotions amplify the wage losses associated with unemployment spells: previously promoted workers experience larger wage losses upon re-employment, and those losses increase as the spell prolongs, even conditional on pre-displacement wage and tenure. I interpret these facts through a structural model of promotions and job search in which firms learn about worker ability from a worker's history of promotions and unemployment spells. When hiring a worker out of unemployment, firms use this information to assign him a position. Because unemployment duration is a noisy signal of ability, the model implies that unemployment can serve as a shock to labor-market sorting through which firms may either correct an erroneous promotion or incorrectly move capable workers back down the job-ladder. Because UI benefits alter search behavior, they also change how much an unemployment spell reveals about a worker. Relative to a flat benefit profile, UI plans that tie benefits to past wages worsen sorting and lower aggregate output, while policies that target benefits toward low-ability workers improve sorting and raise output. ▴