This dissertation is composed of three essays using labor search models to explore the role of skill mismatch in the labor market. The first, “Skill Mismatch in Frictional Labor Markets”, provides theory and evidence on pair-specific skill mismatch in the labor market, defined as the gap between an individual’s skills and the requirements of her job. Employment data from the NLSY97 display some degree of positive sorting into occupations on the basis of cognitive skills, but skill mismatch is pervasive and costly. I develop and estimate a labor search model featuring heterogeneity in worker skills and firm skill requirements that demonstrates how search frictions induce voluntary mismatch acceptance. In addition, the model indicates that skill mismatch is countercyclical; as the labor market tightens, mismatch tolerance falls and wages rise for all workers. However, the elasticity of mismatch tolerance with respect to market tightness varies systematically across the skill space, leading to changes in the composition of employment over the business cycle.
While the model generates levels of mismatch broadly consistent with the data, the degree of positive sorting is underestimated for higher-skilled workers. The second chapter, “Targeted Search in Heterogeneous Labor Markets”, extends the theory of targeted search by introducing continuous skill heterogeneity among workers and firms in frictional labor markets. Workers are unable to fully direct their search, but instead pay an information cost to reduce the variance of the job offer distribution. A lower variance increases the worker’s expected match quality but decreases the offer arrival rate. Results show higher-skilled workers target their search more intensely, decreasing the expected level of mismatch among higher-skilled workers and allowing the model to better fit the data on skill mismatch and sorting.
The third chapter, “Skill Mismatch and the Equilibrium Distribution of Vacancies”, builds on the model in the first chapter by endogenizing the skill distribution of vacancies. The model generates an equilibrium distribution of vacancies in the skill space that depends on labor market conditions such as bargaining power, matching efficiency, and the distribution of unemployed workers. Job creation depends critically on mismatch tolerance: higher levels of expected mismatch reduce the expected value of a vacancy. The model provides new predictions on the response of job creation to the skill distribution of unemployed workers, which can be tested using data on job postings by occupation
