Skill Heterogeneity and Aggregation Bias Over the Business Cycle
30 Pages Posted: 15 Feb 2006
Date Written: November 1995
This paper extends the equilibrium business cycle framework to incorporate ex ante skill heterogeneity among workers. Consistent with the empirical evidence, skilled and unskilled workers in the model face the same degree of cyclical variation in real wages although unskilled workers are subject to substantially higher procyclical variation in employment. Systematic cyclical changes in the average skill level of employed workers are shown to induce bias in aggregate measures of cyclical variation in the labor input, productivity, and the real wage. The introduction of skill heterogeneity improves the model`s ability to match the empirical correlation between total hours and the real wage but the correlation between total hours and labor productivity remains higher than in the data.
JEL Classification: E32, J20, J31
Suggested Citation: Suggested Citation