Crude Substitution: The Cyclical Dynamics of Oil Prices and the College Premium

Linnea Polgreen and Pedro Silos
Working Paper 2006-14a
Revised August 2008

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Higher oil-price shocks benefit unskilled workers relative to skilled workers: At the business-cycle frequency, energy prices and the skill premia display a strong, negative correlation. We assess the robustness of this negative correlation using several methods and data sources, including sector-level data. We find that the negative correlation is robust to different de-trending procedures, and the wages of unskilled workers in energy-intensive industries have a larger positive correlation with oil prices. We also estimate the parameters of an aggregate technology, which uses, among other inputs, energy and heterogeneous skills. We find that both capital-skill and capital-energy complementarity are responsible for this correlation pattern. As energy prices rise, the use of capital decreases and the demand for unskilled labor relative to skilled labor increases, resulting in lower skill premia.

JEL classification: E24, E32, J24

Key words: skill heterogeneity, energy prices, business cycles, capital-skill complementarity

This paper is a comprehensive revision of a paper previously circulated under the same title. The authors thank Steven Durlauf, Nir Jaimovich, Karsten Jeske, Jim Nason, B. Ravikumar, Víctor Ríos-Rull, Ellis Tallman, Robert Tamura, and seminar participants at the Midwest Macroeconomic Meetings, Econometric Society Summer Meetings, Colgate and Stony Brook universities, from whom we have received many useful comments. They especially thank Martin Eichenbaum (the associate editor) and one anonymous referee for providing detailed comments that have greatly improved the paper. Finally, we also thank Mark Dumas and Steve Rosenthal from the U.S. Bureau of Labor Statistics for help with the KLEMS dataset. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Linnea Polgreen, Department of Economics, University of Iowa, Iowa City, IA 52245, 319-335-3797, 319-335-1956 (fax),, or Pedro Silos, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309, 404-498-8630, 404-498-8956 (fax),

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.