Skill Heterogeneity and Aggregation Bias Over the Business Cycle

Author/Editor:

Eswar S Prasad

Publication Date:

November 1, 1995

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 95/122

English

Publication Date:

November 1, 1995

ISBN/ISSN:

9781451854435/1018-5941

Stock No:

WPIEA1221995

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

30

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