Skill Specific Unemployment with Imperfect Substitution of Skills

A large body of literature explains the inferior position of unskilled workersby imposing a structural shift in the labor force skill composition. This papertakes a different approach by emphasizing the connection between cyclicalvariations in skilled and unskilled labor markets. Using a stylized businesscycle model with search frictions in the respective sub-markets, I find thatimperfect substitution between skilled and unskilled labor creates a channelfor the variations in the sub-markets. Together with a general labor augment-ing technology shock, it can generate downward sloping Beveridge curves.Calibrating the model to US data yields higher volatilities in the unskilledlabor markets and reproduces stylized business cycle facts.