Working Paper: NBER ID: w30052
Authors: John R. Grigsby
Abstract: This paper studies aggregate labor market dynamics when workers have heterogeneous skills for tasks which are subject to non-uniform labor demand shocks. When workers have different skills, movements in aggregate wages partly reflect a reallocation of different workers across tasks and into employment. This ensures that there nearly always exists some combination of task-specific demand shocks that induce aggregate employment and wages to negatively comove even in a frictionless economy. Furthermore, such reallocations would be interpreted either as a labor wedge or as a shift in an aggregate labor supply curve in representative agent economies. Developing a method to estimate the multidimensional skill distribution, I show that a frictionless model with realistic heterogeneity can replicate the mean wage increase and employment collapse of the Great Recession. Reduced-form composition-adjustment methods recover positive co-movements between employment and wages in recent periods suggesting an increasing role for composition effects through time, which the model rationalizes through changes in the skill distribution and composition of sectoral shocks.
Keywords: No keywords provided
JEL Codes: E24; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heterogeneous skills (D29) | different responses to labor demand shocks (J49) |
| labor demand shocks (J23) | wages (J31) |
| reallocation effect (workers switching jobs) (J62) | aggregate wages (J31) |
| composition effects (low-wage workers shifting jobs) (J39) | relationship between aggregate employment and wages (J31) |
| skill specificity (J24) | elasticity of labor supply (J22) |
| elasticity of labor supply (J22) | aggregate response of employment and wages to sectoral shocks (J39) |
| labor demand shocks (J23) | negative comovements between employment and wages (J39) |
| skill heterogeneity (J24) | aggregate labor market dynamics (E24) |