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 genera te persistence in the growth of output and other aggregate variables c omparable to that observed in the post-war US data. A key feature is t he relatively low elasticity of substitution between skilled and unski lled labor in the production of human capital. (C) 1998 Elsevier Scien ce B.V. All rights reserved.