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

54 Pages Posted: 19 Jun 2014

See all articles by Steven Lugauer

Steven Lugauer

University of Kentucky - Department of Economics

Date Written: October 1, 2013

Abstract

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

Lugauer, Steven, The Supply of Skills in the Labor Force and Aggregate Output Volatility (October 1, 2013). Available at SSRN: https://ssrn.com/abstract=2334339 or http://dx.doi.org/10.2139/ssrn.2334339

Steven Lugauer (Contact Author)

University of Kentucky - Department of Economics ( email )

Lexington, KY 40506
United States

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