The Supply of Skills in the Labor Force and Aggregate Output Volatility
54 Pages Posted: 19 Jun 2014
Date Written: October 1, 2013
The cyclical volatility of U.S. gross domestic product suddenly declined during the early 1980's 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 reduction in output volatility.
Keywords: Business Cycles, Skill Supply, Demographics
JEL Classification: E32, J24
Suggested Citation: Suggested Citation