Skill Heterogeneity and Equilibrium Unemployment

Opportunities for skilled and unskilled workers in the UK diverged over the last quarter of the twentieth century. We develop an empirical framework consistent with these trends that highlights the importance of skill heterogeneity in both wage setting and labour demand in explaining aggregate labour market outcomes. The framework enables us to quantify the macroeconomic effects of shocks that impact particularly on one group rather than another. We find little evidence of change in labour demand and wage setting behaviour by skill group at the beginning of this century.