Unskilled Workers in an Economy with Skill-Biased Technology

This paper contributes to the search theory of unemployment by endogenously generating matching functions for skilled and unskilled workers from a wage-posting game. The model is capable of producing a positive skill premium and a positive wage di®erential among homogeneous unskilled workers. The skill premium arises from a skill-biased technology; the wage di®erential among unskilled workers sustains because a lower wage is compensated by a higher chance of getting the job. The model provides useful explanations for the observed dynamic patterns of within-skill and between-skill wage di®erentials in the 1970s and 1980s and for the relative cyclical volatility of hours of work by di®erent skill groups of workers. JEL classi ̄cations: C78, J31, J64.