A framework for the analysis of growth and unemployment is developed in a fully specified macroeconomic model, taking account of differences in skills across the workforce. Supply conditions in the labour market are reflected in separate wage equations for different skill groups, while the demand for labour of different skills is also allowed to vary across sectors. The framework enables us to outline the macroeconomic impact of shocks that impact particularly on one group rather than another. We find that a shock to productivity has a much larger adverse impact on aggregate employment if it is biased in favour of the high skilled. This is because the demand for labour shifts against the less skilled at the same time as their wage aspirations increase due to the rise in overall productivity, thus reducing their employment. We also show that increasing the skills of the workforce reduces equilibrium unemployment.
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Paper provided by National Institute of Economic and Social Research in its series NIESR Discussion Papers with number
222.
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