Sorting, Technology Choice, and Specialization

We study a search model where firms' technology choice interacts with labour market frictions to determine the level of specialization. Firms face a tradeoff between efficient specialized technologies and general technologies that can be operated by a wider variety of worker types. In response to a reduction in frictions or an increase to UI benefits firms choose to specialize, thereby amplifying the initial effect on unemployment. This is consistent with the existing gap between observed micro and macroelasticities of unemployment with respect to UI benefits. We find that, along the calibrated technological frontier, more specialization leads to a large increase in unemployment and vacancy supply, while aggregate output per capita and average wages remain relatively constant.