Working Paper: NBER ID: w15117
Authors: Michael W. L. Elsby; Matthew D. Shapiro
Abstract: This paper emphasizes the role of wage growth in shaping work incentives. It provides an analytical framework for labor supply in the presence of a return to labor market experience and aggregate productivity growth. A key finding of the theory is that there is an interaction between these two forms of wage growth that explains why aggregate productivity growth can affect employment rates in steady state. The model thus speaks to an enduring puzzle in macroeconomics by uncovering a channel from the declines in trend aggregate wage growth that accompanied the productivity slowdown of the 1970s to persistent declines in employment. \n \nThe paper also shows that the return to experience for high school dropouts has fallen substantially since the 1970s, which further contributes to the secular decline in employment rates. Taken together, the mechanisms identified in the paper can account for all of the increase in nonemployment among white male high school dropouts from 1968 to 2006. For all white males, it accounts for approximately one half of the increase in the aggregate nonemployment rate over the same period.
Keywords: wage growth; employment; labor market experience; nonemployment
JEL Codes: E24; J2; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reductions in the returns to labor market experience among high school dropouts (J24) | increased joblessness (F66) |
| declines in aggregate wage growth during the productivity slowdown of the 1970s (O49) | long-term reductions in employment levels (J63) |
| wage growth influences work incentives (J31) | higher nonemployment rates (J68) |
| flattening of the wage escalator due to declining returns to experience (J31) | diminished attractiveness of remaining in the workforce (J29) |
| diminished attractiveness of remaining in the workforce (J29) | decreased employment rates (J68) |
| mechanisms of wage growth and returns to experience (J31) | increase in nonemployment among white male high school dropouts from 1968 to 2006 (J79) |
| trends in wage growth and employment levels (J31) | rise in the aggregate nonemployment rate for all white males (J79) |