TY  - JOUR
AU  - Elsby,Michael W. L.
AU  - Shapiro,Matthew D.
TI  - Stepping Off the Wage Escalator: The Effects of Wage Growth on Equilibrium Employment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15117
PY  - 2009
Y2  - June 2009
UR  - http://www.nber.org/papers/w15117
L1  - http://www.nber.org/papers/w15117.pdf
N1  - Author contact info:
Michael W. Elsby
University of Edinburgh
School of Economics
31 Buccleuch Place
Edinburgh
EH8 9JT
United Kingdom
Tel: 011 44 131 650 8361
Fax: 011 44 131 650 4514
E-Mail: Mike.Elsby@ed.ac.uk

Matthew D. Shapiro
Department of Economics
University of Michigan
611 Tappan St
Ann Arbor, MI 48109-1220
Tel: 734/764-5419
Fax: 734 764-2769
E-Mail: shapiro@umich.edu
AB  - 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.

The 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.
ER  -