Heterogeneous Workers and Occupations: Inequality, Unemployment, and Crowding Out

This article attempts to determine the factors behind the cyclical behavior of the skill premium. Using the Current Population Survey Outgoing Rotation Group, the premium is found uncorrelated with contemporaneous output and lags the business cycle. To account for this observation, the article develops a framework that features search frictions. Agents are either high or low educated, and firms post two types of vacancies: the complex, which can be matched with the high educated, and the simple, which can be matched with the high and the low educated. On‐the‐job search for a complex occupation is undertaken by the high educated in simple occupations. An aggregate technological shock induces firms to increase their posting of simple and complex vacancies. As complex vacancies are more costly to create than simple ones, the increase in the former lags that of the latter. As the number of complex vacancies increases with a lag, on‐the‐job search intensity increases on the expense of the hours of work of the high educated in simple occupations. On the other hand, the total hours of the high educated in complex occupations increases. This lagged cyclical increase in the labor input of the high educated in complex occupations causes the skill premium to increase with a lag as well.