Productivity shocks in a model with vintage capital and heterogeneous labor
By: Milton H. Marquis and Bharat Trehan
Contributors: Trehan, Bharat; Federal Reserve Bank of San Francisco
Series: FRBSF working paper -- 2007-06; FRBSF working paper (Online) -- #2007-06.
Publisher: Federal Reserve Bank of San Francisco
Published: 2007
Place of publication: San Francisco]
Language: eng
Format: [electronic resource] /
Description: We construct a vintage capital model in which worker skills lie  along a continuum and workers can be paired with different vintages (as technology  evolves) under a matching rule of "best worker with the best machine".  Labor reallocation in response to technology shocks has two key implications  for the wage premium. First, it limits both the magnitude and duration of  change in the wage premium following a (permanent) embodied technology  shock, so empirically plausible shocks do not lead to the kind of increases  in the wage premium observed in the U.S. during the 1980s and early 1990s  (though an increase in labor force heterogeneity does). Second, positive disembodied  technology shocks tend to push up the wage premium as well, and  while this effect is small, it does mean that a higher premium does not provide  unambiguous information about the underlying shock.  Labor reallocation also means that if embodied technology comes to play  a larger role in long-run growth, investment and savings tend to fall in steady  state, with little effect on output and employment, enabling the household  to increase consumption without sacrificing leisure. The short run effects are  more conventional: permanent shocks to disembodied technology induce a  strong wealth effect that reduces savings and induces a consumption boom  while permanent shocks to embodied technology induce dominant substitution  effects and an expansion characterized by an investment boom.
Notes: Title from PDF file (viewed on Sept. 13, 2007).

"January 2007."

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