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The Supply of Skills in the Labor Force and Aggregate Output Volatility

  • Steven Lugauer

    ()

    (Department of Economics, University of Notre Dame)

The cyclical volatility of U.S. gross domestic product suddenly declined during the early 1980s and remained low for over 20 years. I develop a labor search model with worker heterogeneity and match-specific costs to show how an increase in the supply of high-skill workers can contribute to a decrease in aggregate output volatility. In the model, firms react to changes in the distribution of skills by creating jobs designed specifically for high-skill workers. The new worker-firm matches are more profitable and less likely to break apart due to productivity shocks. Aggregate output volatility falls because the labor market stabilizes on the extensive margin. In a simple calibration exercise, the labor market based mechanism generates a substantial portion of the observed changes in output volatility.

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File URL: http://www3.nd.edu/~tjohns20/RePEc/deendus/wpaper/005_skills.pdf
File Function: First version, 2012
Download Restriction: no

Paper provided by University of Notre Dame, Department of Economics in its series Working Papers with number 005.

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Length: 55 pages
Date of creation: Jun 2012
Date of revision: Jun 2012
Handle: RePEc:nod:wpaper:005
Contact details of provider: Postal: 434 Flanner Hall, Notre Dame, IN 46556
Phone: (574) 631-7698
Web page: http://economics.nd.edu
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  1. Steven Lugauer & Alexis Leon & Daniele Coen-Pirani, 2008. "The Effect of Household Appliances on Female Labor Force Participation: Evidence from Micro Data," 2008 Meeting Papers 541, Society for Economic Dynamics.
  2. Steven Lugauer, 2012. "Estimating the Effect of the Age Distribution on Cyclical Output Volatility Across the United States," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 896-902, November.
  3. Rui Castro & Daniele Coen-Pirani, . "Why Have Aggregate Skilled Hours Become So Cyclical Since the Mid 1980s?," GSIA Working Papers 2006-E27, Carnegie Mellon University, Tepper School of Business.
  4. Katz, Lawrence F & Murphy, Kevin M, 1992. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 35-78, February.
  5. James Feyrer, 2007. "Demographics and Productivity," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 100-109, February.
  6. Cazzavillan, Guido & Olszewski, Krzysztof, 2011. "Skill-biased technological change, endogenous labor supply and growth: A model and calibration to Poland and the US," Research in Economics, Elsevier, vol. 65(2), pages 124-136, June.
  7. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels," NBER Working Papers 14048, National Bureau of Economic Research, Inc.
  8. Nir Jaimovich & Henry E. Siu, 2007. "The Young, the Old, and the Restless: Demographics and Business Cycle Volatility," Discussion Papers 07-010, Stanford Institute for Economic Policy Research.
  9. Acemoglu, D., 1996. "Changes in Unemployment and Wage Inequality: An Alternative Theory and Some Evidence," Working papers 96-15, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Chadwick C. Curtis & Steven Lugauer & Nelson C. Mark, 2011. "Demographic Patterns and Household Saving in China," NBER Working Papers 16828, National Bureau of Economic Research, Inc.
  11. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  12. Daron Acemoglu, 2000. "Technical Change, Inequality, and the Labor Market," NBER Working Papers 7800, National Bureau of Economic Research, Inc.
  13. Steven Lugauer & Richard Jensen & Clayton Sadler, 2014. "An Estimate Of The Age Distribution'S Effect On Carbon Dioxide Emissions," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 914-929, 04.
  14. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
  15. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  16. Robert E. Hall, 2005. "Employment Fluctuations with Equilibrium Wage Stickiness," American Economic Review, American Economic Association, vol. 95(1), pages 50-65, March.
  17. Robert Shimer, 1999. "The Impact of Young Workers on the Aggregate Labor Market," NBER Working Papers 7306, National Bureau of Economic Research, Inc.
  18. Diego Comin & Thomas Philippon, 2005. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Working Papers 11388, National Bureau of Economic Research, Inc.
  19. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  20. Lugauer, Steven, 2012. "Demographic Change And The Great Moderation In An Overlapping Generations Model With Matching Frictions," Macroeconomic Dynamics, Cambridge University Press, vol. 16(05), pages 706-731, November.
  21. Shigeru Fujita, 2011. "Declining labor turnover and turbulence," Working Papers 11-44, Federal Reserve Bank of Philadelphia.
  22. Lugauer, Steven & Redmond, Michael, 2012. "The age distribution and business cycle volatility: International evidence," Economics Letters, Elsevier, vol. 117(3), pages 694-696.
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