My thesis explores the following question: how workers of different skill are allocated across jobs and unemployment over the business cycle. I am interested in understanding the "over-qualification" of workers that occurs during periods of high unemployment, as increased congestion in the labor market hinders workers from finding a suitable match. I focus on the skill mismatch that takes the form of high-skilled workers transitorily accepting low-skill jobs, thereby influencing the labor market prospects of low-skilled workers.

In the first chapter, I develop a business cycle matching model with heterogeneous workers and jobs, which helps understand the role of over-qualification on labor productivity and across-skill unemployment dynamics. I capture the across-skill search externalities and spillover effects that arise when low- and high-skilled workers compete for low-skill jobs, by relaxing the common assumption that all workers qualify for any type of vacancy. I show that the skill mix of vacancies changes over the cycle, thus altering the allocation of workers of different skill across jobs and unemployment. In addition, my model explains observed differences in labor market outcomes of different skill groups, including the higher sensitivity of low-skilled unemployment to changes in economic activity.

In the second chapter, I test the empirical relevance of over-qualification. I ask whether the risk of unemployment induces high-skilled workers to accept transitorily low-skill jobs until a better job comes along. To this end, I study the mismatch rates and job level dynamics of high-skilled workers. Unlike existing studies that only examine how the business cycle affects job level probabilities, I adopt dynamic panel data estimation methods, in which the worker's lagged state (i.e., whether unemployed or mismatched) enters the model as an explanatory variable.

I find evidence suggestive of the existence of over-qualification. The mismatch rates of higher educational groups are higher and exhibit more cyclical variation. Moreover, I find that high-skilled workers are more likely to move into lower job levels when they are unemployed and the unemployment rate is high. In addition, my results point to the existence of an upgrading in the job levels of mismatched high-skilled workers when the unemployment rate is low.