DP11260 A Life-Cycle Model of Trans-Atlantic Employment Experiences

Author(s): Sagiri Kitao, Lars Ljungqvist, Thomas J Sargent
Publication Date: May 2016
Keyword(s): benefits, employment protection, Europe, minimum wage, U.S., Unemployment
JEL(s): E24, J21, J64
Programme Areas: Labour Economics, International Macroeconomics and Finance
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11260

To understand trans-Atlantic employment experiences since World War II, we build an overlapping generations model with two types of workers (high school and college graduates) whose different skill acquisition technologies affect their career decisions. Search frictions affect short-run employment outcomes. The model focuses on labor supply responses near beginnings and ends of lives and on whether unemployment and early retirements are financed by personal savings or public benefit programs. Higher minimum wages in Europe explain why youth unemployment has risen more there than in the U.S. Turbulence, in the form of higher risks of human capital depreciation after involuntary job destructions, causes long-term unemployment in Europe, mostly among older workers, but leaves U.S. unemployment unaffected. The losses of skill interact with workers' subsequent decisions to invest in human capital in ways that generate the age-dependent increases in autocovariances of income shocks observed by Moffitt and Gottschalk (1995).