Recessions and the Labor Market Returns to Cognitive and Social Skills

This article examines how changes in the unemployment rate affect individuals with different skill levels over time using data from the US NLSY79 and NLSY97. Although recessions generally depress labor market outcomes, the authors find that individuals with greater cognitive skills have been less affected by recessions since 2000 compared to those in the 1980s and 1990s. This result occurs despite a decrease in the returns to cognitive skills over the past few decades, on average. The authors’ analysis shows that occupational sorting is a key mechanism driving these changing returns: During post-2000 recessions, workers with high cognitive skills are more likely to transition into higher-paying occupations and face a lower risk of job loss.