Monetary Policy, the Skill Premium, and Unemployment Across Skills∗

This paper studies the implications of a monetary policy shock on the skill premium and unemployment across skills. A dataset on the skill premium and the unemployment ratios of the high and low educated is compiled using the Outgoing Rotation Group of the Current Population Survey. A vector autoregressive analysis demonstrates that a contractionary policy induces a decline in the skill premium and a larger and more persistent increase in the unemployment ratio of the low educated relative to that of the high educated. To account for these patterns, a framework characterized by search frictions is developed where the population is divided into those high and low educated. There are two types of firms: wholesalers and retailers. Wholesalers post two types of vacancies: the complex that can be matched with the high educated, and the simple that can be matched with both the high and low educated. On the job search is allowed. Wholesalers produce intermediate goods using labor only, and sell their product to retailers in a perfectly competitive market. Retailers purchase these intermediate goods, differentiate and sell them to households in a monopolistically competitive market. Nominal rigidities are generated as only some of the retailers adjust their price every period. The monetary authority utilizes the nominal interest rate as the instrument for the conduct of monetary policy, and a positive monetary policy shock replicates most of the observations.