The Cost of Business Cycles for Unskilled Workers

40 Pages Posted: 16 Aug 2005

See all articles by Toshihiko Mukoyama

Toshihiko Mukoyama

Georgetown University - Department of Economics; CIREQ

Aysegul Sahin

Federal Reserve Bank of New York

Date Written: July 2005

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.

Keywords: cost of business cycles, incomplete markets, skill and unemployment

JEL Classification: E24, E32, E61

Suggested Citation

Mukoyama, Toshihiko and Sahin, Aysegul, The Cost of Business Cycles for Unskilled Workers (July 2005). FRB of New York Staff Report No. 214, Available at SSRN: https://ssrn.com/abstract=782386 or http://dx.doi.org/10.2139/ssrn.782386

Toshihiko Mukoyama

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

CIREQ

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

Aysegul Sahin (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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