Report

The cost of business cycles for unskilled workers

Abstract: This paper reconsiders the cost of business cycles under incomplete markets. Primarily, we focus on the heterogeneity in the cost of business cycles among agents with different skill levels. 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 set up a dynamic general equilibrium model with incomplete markets, in which there is heterogeneity in skills, employment status, asset holding, and the discount factor. We find that the welfare cost of business cycles for unskilled workers is substantially higher than that for skilled workers.

Keywords: skill and unemployment; incomplete markets; costs of business cycles;

JEL Classification: E24; E32; E61;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2005-07-01

Number: 214

Note: For a published version of this report, see Toshihiko Mukoyama and Ayşegül Şahin, "Costs of Business Cycles for Unskilled Workers," Journal of Monetary Economics 53, no. 8 (November 2006): 2179-93.