Working Paper: CEPR ID: DP3023
Authors: Giuseppe Bertola; Francine D. Blau; Lawrence Kahn
Abstract: We analyse a 1960-96 panel of OECD countries to explain why the US has moved from relatively high to relatively low unemployment over the last three decades. We find that while macroeconomic and demographic shocks and changing labor market institutions explain a modest portion of this change, the interaction of these shocks and labour market institutions is the most important factor explaining the shift in US relative unemployment. Our finding of the central importance of these interactions is consistent with Blanchard and Wolfers (2000). We also show that, controlling for country- and time-specific effects, high employment is associated with low wage levels and high levels of wage inequality. These findings suggest that US relative unemployment has fallen in recent years in part because its more flexible labour market institutions allow shocks to affect real and relative wages to a greater degree than is true in other countries. Disaggregating, we find that the employment of both younger and older people fell sharply in other countries relative to the United States since the 1970s, with much smaller differences in outcomes among the prime-aged. In the late 1990s, the US had lower unemployment than our models predict, suggesting exceptionally favourable recent US experience.
Keywords: demographics; wage inequality
JEL Codes: E00; J50; J60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic shocks (F41) | unemployment rates (J64) |
| labor market institutions (J08) | unemployment rates (J64) |
| macroeconomic shocks + labor market institutions (J08) | unemployment rates (J64) |
| flexible labor markets (J46) | unemployment rates (J64) |
| flexible labor markets (J46) | wage levels (J31) |
| flexible labor markets (J46) | wage inequality (J31) |
| youth share of population (J13) | unemployment rates (J64) |