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The cost of business cycles for unskilled workers

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  • Toshihiko Mukoyama
  • Aysegul 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.

Suggested Citation

  • Toshihiko Mukoyama & Aysegul Sahin, 2005. "The cost of business cycles for unskilled workers," Staff Reports 214, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:214
    Note: For a published version of this report, see Toshihiko Mukoyama and Ayşegül Şahin, "Costs of Business Cycles for Unskilled Workers," Journal of Monetary Economics 53, no. 8 (November 2006): 2179-93.
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    More about this item

    Keywords

    skill and unemployment; incomplete markets; costs of business cycles;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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