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Cyclical Job Upgrading, Wage Inequality, and Unemployment Dynamics

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  • Sherif Khalifa

Abstract

This paper studies the implications of a monetary policy shock on the skill premium and the unemployment persistence. A VAR demonstrates that a contractionary policy induces a lagged decline in the skill premium and a larger and more persistent increase in the unemployment ratio of the unskilled relative to that of the skilled. A new Keynesian framework characterized by labor search frictions is developed. The labor force is divided into high and low educated. Firms post two types of vacancies: the complex that can be matched with the high educated, and the simple that can be matched with both the high and the low educated. A positive shock to the nominal interest rate induces the high educated unemployed to compete with the low educated, as they increase their search intensity for simple vacancies. As the high educated occupy simple vacancies, they crowd out the low educated into unemployment. This downgrading of jobs, and the subsequent crowding out of the low educated into unemployment, provide a possible explanation to unemployment persistence and the response of the skill premium.

Suggested Citation

  • Sherif Khalifa, 2013. "Cyclical Job Upgrading, Wage Inequality, and Unemployment Dynamics," International Economic Journal, Taylor & Francis Journals, vol. 27(4), pages 549-585, December.
    • Handle: RePEc:taf:intecj:v:27:y:2013:i:4:p:549-585
    DOI: 10.1080/10168737.2012.685886
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    1. Krause, M.U. & Lubik, T.A., 2004. "On-the-job Search and the Cyclical Dynamics of the Labor Market," Other publications TiSEM 08a72137-ff72-4e18-add3-1, Tilburg University, School of Economics and Management.
    2. Claudio Soto, 2003. "Monetary Policy, Job Flows and Unemployment in a Sticky Price Framework," Working Papers Central Bank of Chile 219, Central Bank of Chile.
    3. Alvaro Riascos, 2002. "Monetary Policy Rules in a Search Model of the Labor Market," Borradores de Economia 221, Banco de la Republica de Colombia.
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