Working Paper: CEPR ID: DP2008
Authors: David Card; Francis Kramarz; Thomas Lemieux
Abstract: Standard economic models suggest that adverse demand shocks will lead to bigger employment losses if institutional factors like minimum wages or trade unions prevent real wages from declining. Some analysts have argued that this insight explains the dichotomy between the United States, where real wages of less-skilled workers fell over the 1980s and aggregate employment expanded vigorously, and Europe, where real wages of less-skilled workers were constant and employment was stagnant. We test this hypothesis by comparing recent changes in wage and employment rates for different age and education groups in Canada, France and the United States. We argue that similar trade and technology shocks that led to falling real wages for less-skilled workers in the United States have affected Canada and France. Consistent with the view that labour market institutions in these countries inhibit wage flexibility, we find that the relative wages of less-skilled workers fell somewhat less in Canada that in the United States during the 1980s and did not fall at all in France. Nevertheless, we find similar patterns of employment changes by skill group in the three countries.
Keywords: wage flexibility; relative employment changes; technical shocks
JEL Codes: J23; J30; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adverse demand shocks (E00) | greater employment losses (J65) |
| institutional factors inhibit wage flexibility (J38) | greater employment losses (J65) |
| adverse demand shocks (E00) | relative wages of less-skilled workers (J31) |
| relative wages of less-skilled workers (J31) | decrease in their relative labor supply (J49) |
| adverse demand shocks (E00) | relatively constant wages for less-skilled workers (in France) (J31) |
| relatively constant wages for less-skilled workers (in France) (J31) | decline in their relative employment (J63) |
| adverse demand shocks (E00) | smaller relative wage adjustments (in Canada) (J39) |
| smaller relative wage adjustments (in Canada) (J39) | less pronounced employment changes than in France (J69) |
| lower initial wages or lower computer usage (J39) | slower wage growth (J39) |
| lower initial wages or lower computer usage (J39) | somewhat slower employment growth (J69) |
| negative demand shocks (E31) | downward pressure on the wages of less-skilled workers (F66) |
| wage flexibility (J31) | moderates employment losses for groups affected by negative demand shocks (J68) |