The Implications of Changes in Hours Fluctuations on Welfare Costs of Business Cycles

Abstract

Hours volatility has changed non-monotonically across skill groups since the mid-1980s. This study researches the implications of such changes on the welfare costs of business cycles. Using a partial equilibrium model in which hours fluctuations are the only source of uncertainty, we find that (1) the welfare cost of business cycles of mid-skilled workers is comparable to that of high-skilled workers after the mid-1980s, (2) the relative welfare cost of low-skilled to high-skilled workers declined substantially but remains very high, and (3) treating mid- and low-skilled workers as one group provides incorrect information about the changes in welfare costs.

Keywords: Change in hours fluctuation, welfare cost of business cycle

JEL Classification: J24, E24, E32