Human capital formation and business cycle persistence

In this paper we examine the role of the formation of human capital in propagating shocks over the business cycle. We show that a two-sector equilibrium business cycle model with human capital is able to generate persistence in the growth of output and other aggregate variables comparable to that observed in the post-war US data. A key feature is the relatively low elasticity of substitution between skilled and unskilled labor in the production of human capital. (C) 1998 Elsevier Science B.V. All rights reserved.