Crude substitution: The cyclical dynamics of oil prices and the skill premium

At the business cycle frequency, energy prices and the skill premium display a strong, negative correlation. This fact is robust to different de-trending procedures. Identifying exogenous shocks to oil prices using the Hoover–Perez [1994. Post hoc ergo propter once more: an evaluation of ‘Does monetary policy matter?’ in the spirit of James Tobin. Journal of Monetary Econonmics 34, 47–73] dates, shows that the skill premium falls in response to such a shock. The estimation of the parameters of an aggregate technology that uses, among other inputs, energy and heterogeneous skills, demonstrates that capital–skill and capital–energy complementarity are responsible for this correlation. As energy prices rise, the use of capital decreases and the demand for unskilled labor—relative to skilled labor—increases, lowering the skill premium.