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The cost of business cycles for unskilled workers

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  • Toshihiko Mukoyama
  • Aysegül Sahin

Abstract

This paper reconsiders the cost of business cycles under incomplete markets. Primarily, we focus on the heterogeneity in the cost of business cycles among agents with different skill levels. 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 set up a dynamic general equilibrium model with incomplete markets, in which there is heterogeneity in skills, employment status, asset holding, and the discount factor. We find that the welfare cost of business cycles for unskilled workers is substantially higher than that for skilled workers.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 214.

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Date of creation: 2005
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Handle: RePEc:fip:fednsr:214

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Related research

Keywords: Unemployment ; Business cycles ; Labor market;

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References

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  1. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(3), pages 659-84, August.
  2. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(5), pages 867-896, October.
  3. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, American Economic Association, vol. 94(4), pages 964-990, September.
  4. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(1), pages 118-42, February.
  5. Adalbert Mayer, 2008. "Education, Self-Selection, and Intergenerational Transmission of Abilities," Journal of Human Capital, University of Chicago Press, University of Chicago Press, vol. 2(1), pages 106-128.
  6. 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.
  7. Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 187-218 National Bureau of Economic Research, Inc.
  8. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(6), pages 1364-83, December.
  9. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(1), pages 285-326, February.
  10. 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.
  11. Jacob Mincer, 1991. "Education and Unemployment," NBER Working Papers 3838, National Bureau of Economic Research, Inc.
  12. Topel, Robert, 1993. "What Have We Learned from Empirical Studies of Unemployment and Turnover?," American Economic Review, American Economic Association, American Economic Association, vol. 83(2), pages 110-15, May.
  13. Maurice Obstfeld, 1995. "Evaluating Risky Consumption Paths: The Role of Intertemporal Substitutability," NBER Technical Working Papers 0120, National Bureau of Economic Research, Inc.
  14. 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, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-35.
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Cited by:
  1. Per Krusell & Toshihiko Mukoyama & Aysegul Sahin, 2009. "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," NBER Working Papers 15282, National Bureau of Economic Research, Inc.
  2. Mukoyama, Toshihiko, 2013. "Understanding the welfare effects of unemployment insurance policy in general equilibrium," Journal of Macroeconomics, Elsevier, Elsevier, vol. 38(PB), pages 347-368.

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