Crude Substitution: The Cyclical Dynamics of Oil Prices and the Skill Premium

FRB of Atlanta Working Paper No. 2006-14a

30 Pages Posted: 5 Oct 2006 Last revised: 6 Jul 2014

See all articles by Linnea Polgreen

Linnea Polgreen

University of Iowa - Henry B. Tippie College of Business - Department of Economics

Pedro Silos

Federal Reserve Bank of Atlanta

Date Written: August 1, 2008

Abstract

Higher oil-price shocks benefit unskilled workers relative to skilled workers: At the business-cycle frequency, energy prices and the skill premia display a strong, negative correlation. We assess the robustness of this negative correlation using several methods and data sources, including sector-level data. We find that the negative correlation is robust to different de-trending procedures, and the wages of unskilled workers in energy-intensive industries have a larger positive correlation with oil prices. We also estimate the parameters of an aggregate technology, which uses, among other inputs, energy and heterogeneous skills. We find that both capital-skill and capital-energy complementarity are responsible for this correlation pattern. As energy prices rise, the use of capital decreases and the demand for unskilled labor relative to skilled labor increases, resulting in lower skill premia.

Keywords: skill heterogeneity, energy prices, business cycles, capital-skill complementarity

JEL Classification: E24, E32, J24

Suggested Citation

Polgreen, Linnea and Silos, Pedro, Crude Substitution: The Cyclical Dynamics of Oil Prices and the Skill Premium (August 1, 2008). FRB of Atlanta Working Paper No. 2006-14a. Available at SSRN: https://ssrn.com/abstract=934875 or http://dx.doi.org/10.2139/ssrn.934875

Linnea Polgreen

University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )

108 Pappajohn Building
Iowa City, IA 52242
United States
319-335-3797 (Phone)
319-335-1956 (Fax)

Pedro Silos (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8630 (Phone)
404-498-8956 (Fax)

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