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Skill Heterogeneity and Aggregation Bias over the Business Cycle

30 Pages Posted: 15 Feb 2006  

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

Date Written: November 1995

Abstract

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

Prasad, Eswar S., Skill Heterogeneity and Aggregation Bias over the Business Cycle (November 1995). IMF Working Paper, Vol. , pp. 1-30, 1995. Available at SSRN: https://ssrn.com/abstract=883268

Eswar S. Prasad (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

440 Warren Hall
Ithaca, NY 14853
United States

HOME PAGE: http://prasad.aem.cornell.edu

Cornell University - Department of Economics ( email )

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Brookings Institution ( email )

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NBER ( email )

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IZA Institute of Labor Economics

P.O. Box 7240
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