Dynamics of Occupation Choice, Skill Investment and Output Pricing with Multidimensional Skill

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AbstractThe effects of trade and technology on workers in the United States and elsewhere have become a central policy concern. As technology will continue to have an impact on the labor market as the nature of work evolves and trade patterns change, it is important to understand how the existing workforce will adapt to these changes through investment in acquiring skills. The primary goal of this research is to advance our understanding of these effects in order to help guide relevant policy decisions. The project will examine how rapid developments in technology and trade patterns can affect the importance of different skills in the labor market, and how workers adapt to these changes, for instance by learning new skills or changing jobs. In particular, the project will examine how trade and technology shocks and the response in the labor market affect the distribution of income, with focus on differences between workers of different ages, educational levels and occupations.The project develops a framework of skill investment and job choice when both skills and jobs are heterogeneous but are not hierarchically ordered. This project focuses on two kinds of models. The first model treats the wage structure as exogenous to the worker's decisions. Workers repeatedly choose jobs, and how much to invest in which skills given how they are rewarded. Using this model, the research examines both theoretically and empirically how worker decisions respond to unanticipated technology and trade shocks. The second one is a general equilibrium model of skill investment in this setting. The research based on this model investigates the properties of the equilibrium when workers are ex ante homogeneous and studies what happens when, after they have made their skill investment decisions, these workers face a shock. This research examines ripple effects that alter outcomes even for workers not directly affected. The research also weighs the direct losses to a worker adversely affected by a shock that favored some workers and hurt others against the possible indirect benefit from a decline in the price of output. Finally, the project will extend the model to allow workers to be heterogeneous in their level of education. This research will be useful in exploring the links between education and skill investment, which is a crucial link in explaining the relation between education and jobs.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.