Macro - Paul Jackson (NUS)

Title: The Underemployment Trap

Abstract: Many college graduates are underemployed, i.e. are working in occupations that do not require a college degree. We document that underemployed workers are less likely to transition to a college occupation the longer they are underemployed and that longer underemployment histories are associated with lower wages in college occupations. To explain these findings, we develop a directed search model with unobserved heterogeneity, occupation specific human capital, heterogeneous firms, and on the job search. Workers are uncertain about their job-finding probability in college jobs and learn through search. Underemployment is generated by search and informational frictions as workers with a low expected job-finding probability in college occupations self-select into underemployment. Once underemployed, workers' college occupation specific human capital decays. A quantitative decomposition shows that unobserved heterogeneity accounts for nearly 96% of the duration dependence in underemployment.