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Costs of Business Cycles for Unskilled Workers

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  • Toshihiko Mukoyama

    ()
    (Department of Economics, Concordia University)

  • Aysegul Sahin

    ()
    (Federal Reserve Bank of New York)

Abstract

This paper reconsiders the cost of business cycles under market incompleteness. Primarily, we focus on the heterogeneity in the cost among different skill groups. Unskilled workers are subject to a much larger risk of unemployment during recessions than are skilled workers. Moreover, unskilled workers earn less income, which limits their ability to self-insure. We examine how this heterogeneity in unemployment risk and income translates into heterogeneity in the cost of business cycles. We find that the welfare cost of business cycles for unskilled workers is substantially higher than the welfare cost for skilled workers.

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Bibliographic Info

Paper provided by Concordia University, Department of Economics in its series Working Papers with number 05002.

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Length: 39 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:crd:wpaper:05002

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Keywords: Cost of Business Cycles; Incomplete Markets; Skill and Unemployment;

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References

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  1. Michael Keane & Eswar Prasad, 1993. "Skill Levels and the Cyclical Variability of Employment, Hours, and Wages," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 711-743, December.
  2. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
  3. Matthew J. Lindquist, 2004. "Capital-Skill Complementarity and Inequality Over the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 519-540, July.
  4. Gadi Barlevy, 2003. "The cost of business cycles under endogenous growth," Working Paper Series WP-03-13, Federal Reserve Bank of Chicago.
  5. Per Krusell & Anthony A. Smith, Jr., 1999. "On the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 245-272, January.
  6. Topel, Robert, 1993. "What Have We Learned from Empirical Studies of Unemployment and Turnover?," American Economic Review, American Economic Association, vol. 83(2), pages 110-15, May.
  7. Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, vol. 38(7), pages 1471-1486, August.
  8. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  9. Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Working Papers 4719, National Bureau of Economic Research, Inc.
  10. Adalbert Mayer, 2008. "Education, Self-Selection, and Intergenerational Transmission of Abilities," Journal of Human Capital, University of Chicago Press, vol. 2(1), pages 106-128.
  11. David Card, 1994. "Earnings, Schooling, and Ability Revisited," NBER Working Papers 4832, National Bureau of Economic Research, Inc.
  12. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
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  14. Michael P. Keane & Eswar S. Prasad, 1991. "The relation between skill levels and the cyclical variability of employment, hours and wages," Discussion Paper / Institute for Empirical Macroeconomics 41, Federal Reserve Bank of Minneapolis.
  15. Per Krusell & Toshihiko Mukoyama & Aysegul Sahin & Anthony A. Smith, Jr., 2008. "Appendices for "Revisiting the Welfare Effects of Eliminating Business Cycles"," Technical Appendices 08-211, Review of Economic Dynamics.
  16. Toshihiko Mukoyama & Aysegul Sahin, 2005. "Costs of Business Cycles for Unskilled Workers," Working Papers 05002, Concordia University, Department of Economics.
  17. Jacob Mincer, 1991. "Education and Unemployment," NBER Working Papers 3838, National Bureau of Economic Research, Inc.
  18. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-83, December.
  19. Jacob Mincer, 1991. "Education and Unemployment of Women," NBER Working Papers 3837, National Bureau of Economic Research, Inc.
  20. Santiago Budria Rodriguez & Javier Diaz-Gimenez & Vincenzo Quadrini & Jose-Victor Rior-Rull, 2002. "Updated facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-35.
  21. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February.
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Citations

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Cited by:
  1. Ascari, Guido & Ropele, Tiziano, 2012. "Disinflation in a DSGE perspective: Sacrifice ratio or welfare gain ratio?," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 169-182.
  2. Philip Jung & Keith Kuester, 2008. "The (un)importance of unemployment fluctuations for welfare," Working Papers 08-31, Federal Reserve Bank of Philadelphia.
  3. Per Krusell & Toshihiko Mukoyama & Aysegul Sahin & Anthony A. Smith, Jr., 2008. "Appendices for "Revisiting the Welfare Effects of Eliminating Business Cycles"," Technical Appendices 08-211, Review of Economic Dynamics.
  4. Toshihiko Mukoyama & Aysegul Sahin, 2005. "Costs of Business Cycles for Unskilled Workers," Working Papers 05002, Concordia University, Department of Economics.
  5. Sparber, Chad, 2011. "Unemployment, Skills, and the Business Cycle Since 2000," Working Papers 2011-04, Department of Economics, Colgate University.
  6. Krusell, Per & Mukoyama, Toshihiko & Sahin, Aysegul, 2009. "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," CEPR Discussion Papers 7429, C.E.P.R. Discussion Papers.
  7. Richard McManus, 2013. ""We're all in this together"? A DSGE interpretation," Discussion Papers 13/08, Department of Economics, University of York.
  8. M. Alper Çenesiz & Christian Pierdzioch, 2010. "Capital mobility and labor market volatility," International Economics and Economic Policy, Springer, vol. 7(4), pages 391-409, December.
  9. Kyle Chauvin & David Laibson & Johanna Mollerstrom, 2011. "Asset Bubbles and the Cost of Economic Fluctuations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 233-260, 08.
  10. Colleen Carey & Stephen H. Shore, 2013. "From the Peaks to the Valleys: Cross-State Evidence on Income Volatility over the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 549-562, May.
  11. Richard McManus, 2013. "Austerity versus Stimulus: A DSGE Political Economy Explanation," Discussion Papers 13/09, Department of Economics, University of York.
  12. Adam Elbourne & Debby Lanser & Bert Smid & Martin Vromans, 2008. "Macroeconomic resilience in a DSGE model," CPB Discussion Paper 96, CPB Netherlands Bureau for Economic Policy Analysis.
  13. Michał Gradzewicz & Krzysztof Makarski & Joanna Tyrowicz, 2013. "Do We Really Need to Start From Scratch? Economic Theory on Economic Crises," Working Papers 2013-17, Faculty of Economic Sciences, University of Warsaw.
  14. Mollerstrom, Johanna Britta & Laibson, David I. & Chauvin, Kyle, 2011. "Asset Bubbles and the Cost of Economic Fluctuations," Scholarly Articles 9938146, Harvard University Department of Economics.
  15. Greg Hannsgen, 2007. "Are the Costs of the Business Cycle 'Trivially Small'?," Economics Working Paper Archive wp_492, Levy Economics Institute.
  16. Hannsgen, Greg, 2008. "The welfare economics of macroeconomics and chooser-dependent, non-expected utility preferences: A Senian critique with an application to the costs of the business cycle," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(5), pages 1980-1993, October.
  17. Mueller, Andreas I., 2012. "Separations, Sorting and Cyclical Unemployment," IZA Discussion Papers 6849, Institute for the Study of Labor (IZA).

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