Cyclical Implications of the Variable Utilization of Physical and Human Capital

We develop a business cycle model in which consumption goods, physical capital, and human capital are produced in separate sectors. An important feature of the model is that human and machine inputs in the production process are treated symmetrically: each has both a stock and flow component. The model's representative agent is permitted to use the stocks (physical and human capital) at less than capacity by varying the utilization rate of capital and the hours of labor devoted to production. Utilizing physical capital at less than capacity slows depreciation; utilizing human capital at less than capacity frees time that may be devoted to study, resulting in more rapid human capital accumulation. We find that the model nicely characterizes cyclical properties of U.S. data on output, investment, consumption and employment, particularly at business-cycle frequencies.