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

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

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

  • Michael W. L. Elsby
  • Matthew D. Shapiro
American Economic Review
vol. 102, no. 4, June 2012
(pp. 1378–1413)
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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)

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

Additional Materials

JEL Classification

  • 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