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American Economic Review: Vol. 102 No. 4 (June 2012)

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Why Does Trend Growth Affect Equilibrium Employment? A New Explanation of an Old Puzzle

Article Citation

Elsby, Michael W. L., and Matthew D. Shapiro. 2012. "Why Does Trend Growth Affect Equilibrium Employment? A New Explanation of an Old Puzzle." American Economic Review, 102(4): 1378-1413.

DOI: 10.1257/aer.102.4.1378

Abstract

That the employment rate appears to respond to changes in trend growth is an enduring macroeconomic puzzle. This paper shows that, in the presence of a return to experience, a slowdown in productivity growth raises reservation wages, thereby lowering aggregate employment. The paper develops new evidence that shows this mechanism is important for explaining the growth-employment puzzle. The combined effects of changes in aggregate wage growth and returns to experience account for all the increase from 1968 to 2006 in nonemployment among low-skilled men and for approximately half the increase in nonemployment among all men. (JEL E24, J24, J31)

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Authors

Elsby, Michael W. L. (U Edinburgh)
Shapiro, Matthew D. (U MI)

JEL Classifications

E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
J24: Human Capital; Skills; Occupational Choice; Labor Productivity
J31: Wage Level and Structure; Wage Differentials


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