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Skill Heterogeneity and the Business Cycle

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  • Eswar Prasad

Abstract

This paper extends the real business cycle framework to incorporate ex ante skill heterogeneity among workers. Consistent with the empirical evidence, skilled and unskilled workers in the model face the same degree of cyclical variation in real wages, although unskilled workers are subject to substantially higher procyclical variation in employment. Systematic cyclical changes in the average skill level of employed workers are shown to induce bias in standard aggregate measures of cyclical variation in the labour input, productivity, and the real wage. The introduction of skill heterogeneity improves the model's ability to match the empirical correlation between total hours and the real wage, but the correlation between total hours and labour productivity remains higher than it does in the data.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 29 (1996)
Issue (Month): 4 (November)
Pages: 910-29

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Handle: RePEc:cje:issued:v:29:y:1996:i:4:p:910-29

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Cited by:
  1. Cazzavillan, Guido & Olszewski, Krzysztof, 2011. "Skill-biased technological change, endogenous labor supply and growth: A model and calibration to Poland and the US," Research in Economics, Elsevier, vol. 65(2), pages 124-136, June.
  2. CASTRO, Rui & COEN-PIRANI, Daniele, 2005. "Why Have Aggregate Skilled Hours Become so Cyclical since the Mid-1980’s?," Cahiers de recherche 24-2005, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. Lilia Maliar & Serguei Maliar, 1999. "- Differential Responses Of Labor Supply Across Productivity Groups," Working Papers. Serie AD 1999-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  4. Linnea Polgreen & Pedro Silos, 2006. "Crude substitution: the cyclical dynamics of oil prices and the college premium," Working Paper 2006-14, Federal Reserve Bank of Atlanta.
  5. Maliar, Lilia & Maliar, Serguei, 2004. "Indivisible-labor, lotteries and idiosyncratic productivity shocks," Mathematical Social Sciences, Elsevier, vol. 48(1), pages 23-35, July.
  6. Finn E. Kydland & D'Ann M. Petersen, 1997. "Does being different matter?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 2-11.
  7. Michael Sattinger & Sumati Srinivas, 2003. "The Employment-Productivity Relation with Employment Criteria," Discussion Papers 03-07, University at Albany, SUNY, Department of Economics.
  8. Lahiri, Radhika & Magnani, Elisabetta, 2012. "Endogenous skill heterogeneity and inflation," Economic Modelling, Elsevier, vol. 29(5), pages 1745-1756.

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