June 2009

No. 4258: Cyclical Skill-Biased Technological Change

published as 'Skill-Biased Technological Change and the Business Cycle' in: Review of Economics and Statistics, 2013, 95(4), 1222-1237

Over the past two decades, technological progress has been biased towards making skilled labor more productive. What does skill-biased technological change imply for business cycles? To answer this question, we construct a quarterly series for the skill premium from the CPS and use it to identify skill-biased technology shocks in a VAR with long run restrictions. We find that hours worked fall in response to skill-biased, but not in response to skill-neutral improvements in technology. Skill-biased technology shocks are associated with increases in the relative price of investment, indicating that capital and skill are substitutes in aggregate production.