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Costs of Business Cycles for Unskilled Workers

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Author Info
Toshihiko Mukoyama () (Department of Economics, Concordia University)
Aysegul Sahin () (Federal Reserve Bank of New York)

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Abstract

This paper reconsiders the cost of business cycles under market incompleteness. Primarily, we focus on the heterogeneity in the cost among different skill groups. Unskilled workers are subject to a much larger risk of unemployment during recessions than are skilled workers. Moreover, unskilled workers earn less income, which limits their ability to self-insure. We examine how this heterogeneity in unemployment risk and income translates into heterogeneity in the cost of business cycles. We find that the welfare cost of business cycles for unskilled workers is substantially higher than the welfare cost for skilled workers.

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Publisher Info
Paper provided by Concordia University, Department of Economics in its series Working Papers with number 05002.

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Length: 39 pages
Date of creation: Jun 2005
Date of revision:
Handle: RePEc:crd:wpaper:05002

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Related research
Keywords: Cost of Business Cycles; Incomplete Markets; Skill and Unemployment;

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

References listed on IDEAS
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  1. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February. [Downloadable!] (restricted)
  2. Andrew Atkeson & Christopher Phelan, 1994. "Reconsidering the Costs of Business Cycles with Incomplete Markets," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 187-218 National Bureau of Economic Research, Inc. [Downloadable!]
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  3. Per Krusell & Anthony A. Smith, Jr., 1999. "On the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 245-272, January. [Downloadable!] (restricted)
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  4. Hansen, Gary D & Imrohoroglu, Ayse, 1992. "The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 118-42, February. [Downloadable!] (restricted)
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  5. Matthew J. Lindquist, 2004. "Capital-Skill Complementarity and Inequality Over the Business Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 519-540, July. [Downloadable!] (restricted)
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  6. Jacob Mincer, 1991. "Education and Unemployment," NBER Working Papers 3838, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Topel, Robert, 1993. "What Have We Learned from Empirical Studies of Unemployment and Turnover?," American Economic Review, American Economic Association, vol. 83(2), pages 110-15, May. [Downloadable!] (restricted)
  8. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October. [Downloadable!] (restricted)
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  9. Obstfeld, Maurice, 1994. "Evaluating risky consumption paths: The role of intertemporal substitutability," European Economic Review, Elsevier, vol. 38(7), pages 1471-1486, August. [Downloadable!] (restricted)
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  10. Adalbert Mayer, 2004. "Education, Self-Selection and Intergenerational Transmission of Abilities," 2004 Meeting Papers 107, Society for Economic Dynamics. [Downloadable!]
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  11. Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-83, December. [Downloadable!] (restricted)
  12. Robert E. Lucas, 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March. [Downloadable!]
  13. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  14. David Card, 1994. "Earnings, Schooling, and Ability Revisited," NBER Working Papers 4832, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Per Krusell & Toshihiko Mukoyama & Aysegul Sahin & Anthony A. Smith, Jr., 2009. "Revisiting the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 393-402, July. [Downloadable!] (restricted)
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  16. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, vol. 94(4), pages 964-990, September. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Philip Jung & Keith Kuester, 2008. "The (un)importance of unemployment fluctuations for welfare," Working Papers 08-31, Federal Reserve Bank of Philadelphia. [Downloadable!]
  2. Adam Elbourne & Debby Lanser & Bert Smid & Martin Vromans, 2008. "Macroeconomic resilience in a DSGE model," CPB Discussion Papers 96, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  3. Greg Hannsgen, 2007. "Are the Costs of the Business Cycle 'Trivially Small'?," Economics Working Paper Archive wp_492, Levy Economics Institute, The. [Downloadable!]
  4. Per Krusell & Toshihiko Mukoyama & Ayseg ul Sahin, 2007. "Labor-Market Matching with Precautionary Savings and Aggregate Fluctuations," Levine's Bibliography 122247000000001783, UCLA Department of Economics. [Downloadable!]
    Other versions:
  5. Per Krusell & Toshihiko Mukoyama & Aysegul Sahin & Anthony A. Smith, Jr., 2009. "Revisiting the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 393-402, July. [Downloadable!] (restricted)
    Other versions:
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