Labor market transitions after layoffs: the role of occupational skills

In this paper, we study the role of occupational skills in individuals’ labor market transitions. Using rich data on skills required in occupations, we introduce a concept of occupation-specific human capital and develop empirical measures for occupational specificity and occupation distance. We find a strong relationship between the degree of occupational specificity and individuals’ mobility patterns and wages. In particular, after layoffs, individuals with more occupation-specific human capital are less likely to find reemployment in a different occupation and are more likely to suffer prolonged periods of unemployment. We also find that, upon reemployment, these individuals receive a wage premium. These results suggest a risk-return tradeoff to educational investments into more specific human capital. In addition, we develop a measure for the distance between occupations and find that individuals who move to occupations with similar skill requirements (i.e. lower distance) suffer smaller wage losses than individuals with more distant moves. Thus, we show that skills are transferable across occupations and that occupational specificity largely determines mobility patterns and wages after layoffs.