We study a general equilibrium model of the labor market in which agents slowly learn about their suitability for jobs. Our model reproduces desirable features of the data, many of which standard models fail to replicate. We explore how, in such an environment, asymmetric information can lead to substantial misallocation. We calibrate our model to US data and quantify the welfare loss arising from misallocation due to informational frictions. The tractability of the model allows us to explore the responsiveness of wages and employment to an aggregate shock. We find that wage rigidity arises endogenously because of protracted learning, and in line with the data, the model is able to generate a larger and more persistent employment response.
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Jake Bradley and Lukas Mann
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