Productivity Shocks in a Model with Vintage Capital and Heterogeneous Labor

Abstract

We construct a vintage capital model in which worker skills lie along a continuum and workers can be paired with dierent vintages (as tech- nology 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 dis- embodied technology shocks tend to push up the wage premium as well, and while this eect