Skill mismatch and structural unemployment

I build a model in which structural change creates a mismatch between the skill requirements in the available jobs and workers’ current skills. When the mismatch is severe, labor markets go through a prolonged adjustment process wherein job creation is low, and unemployment is high. Due to matching frictions, firms find it harder to locate workers with the requisite skills for novel jobs and they respond by creating fewer jobs. The paucity of novel jobs increases unemployment for all workers—including those who already hold the requisite skills—and discourages skill acquisition by workers. Moreover, structural change interacts with the business cycle, causing a large and long-lasting increase in unemployment that concentrates in recessions. I demonstrate that the decline in routine-cognitive jobs outside manufacturing—a pervasive structural change that has affected U.S. labor markets since the late 90s—created a skill mismatch that contributed to the long-lasting increase in unemployment observed during the Great Recession. My evidence suggests that the amplification effects introduced by matching frictions are important. Moreover, I find that the skill mismatch has a larger effect during recessions and in labor markets where the demand for goods and services is depressed.