Procyclical Skill Retooling and Equilibrium Search* Ian King and Arthur Sweetman February 2002 Abstract We argue that more workers choose to switch occupations in booms than in recessions. That is, skill retooling is procyclical. This view is consistent with Lucas and Prescott’s (1974) equilibrium search model modified with aggregate shocks and unemployment insurance. Empirical support is found in a unique Canadian administrative data set that measures the annual flow of workers (from 1979-1993) who separate from their jobs to "return to school". This flow is strongly procyclical. JEL Codes: J24, E32 Key words: business cycles, schooling, equilibrium search Ian King: Department of Economics, University of Auckland, Auckland, New Zealand. Telephone: +64-9-373-7599 (ext. 7664), Fax: +64-9-373-7427, e-mail: ip.king@auckland.ac.nz (corresponding author) Arthur Sweetman: School of Policy Studies, Queen’s University, Kingston, Ontario, Canada K7L 3N6. Telephone: (613) 533-3114, Fax: (613) 533-2135, e-mail: sweetman@qsilver.queensu.ca *We would like to thank Carol Guest, Anne Routhier, and Ging Wong of Human Resources Development Canada for making the data used here available to us. We would also like to thank Allen Gregory, Boyan Jovanovic, John Kennes, Jack Leach, Ed Prescott, Gregor Smith, and the participants at seminars at Queen’s University, the University of Western Ontario, the University of Washington, the Canadian Economics Association Meetings at Brock University, and the Mid-West Macro Meetings at the Ohio State University, for helpful comments. This research was funded by a grant from the Social Sciences and Humanities Research Council of Canada.