Working Paper 2017-05: Ammar Farooq

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05232017-WP-u-shape-of-over-education

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Authors:

Ammar Farooq, Department of Economics, Georgetown University


Abstract:

This paper analyzes the relationship between age and the skill requirements of jobs performed by workers. I document that the proportion of college degree holders working in occupations that do not require a college degree is U-shaped over the life cycle and that there is a rise in transitions to non-college jobs among prime age college workers. The downward trend at initial stages of the life cycle is consistent with workhorse models of labor mobility, however, the rising trend at middle stages of the career is not. Such movements down the occupation ladder are also accompanied by average wage losses of 10% from the previous year. I develop an equilibrium model of frictional occupation matching featuring skill accumulation and depreciation along with worker and firm heterogeneity that can match the life cycle profile of downward occupational mobility. The model shows that skill depreciation is the key driver of transitions to low skill jobs with age. Using the model, I simulate the impact of different types of structural change in the labor market and find that the welfare consequences of long term changes depend on the interaction of the life cycle and human capital investment dimension.