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Implicit Contracts and the Cyclicality of the Skill-Premium

To examine the cyclical behavior of the skill-premium, this paper introduces implicit labor contracts in a DSGE model where production is characterized by capital-skill complementarity and the utilization of capital is endogenous. It is shown that this model can reproduce the observed cyclical patterns of wages and the skill-premium. The feature of capital-skill complementarity coupled with variable capital utilization rates does not come at odds with the acyclical behavior of the skill-premium. The paper argues that the skill-complementarity of capital is not a quantitatively significant factor at high frequencies. The key aspects are the contracts and the capital utilization margin.

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2007/19.

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Length: 47 pages
Date of creation: Jun 2007
Date of revision: Apr 2010
Publication status: Published in Journal of Economic Dynamics and Control , Volume 35, 2011, 963-979
Handle: RePEc:cdf:wpaper:2007/19
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