This conference is supported by Grant #2011-12-06 from Alfred P. Sloan Foundation
As of a quarter-century ago, the conventional wisdom among macroeconomists was that real wage rates were more or less non-cyclical, and many macroeconomic models described wage inflexibility as a key contributor to cyclical unemployment. Since then, however, numerous empirical studies based on microdata for workers have found that real wages are substantially pro-cyclical. This pro-cyclicality had been obscured in aggregate wage statistics, which tend to give more weight to low-skill workers during expansions than during recessions. Most of the U.S. microdata-based literature is based on data extending no later than the early 1990s, so an obvious question is what the cyclical wage patterns have been more recently. Most importantly, how have wages behaved during the Great Recession? Is there reason to think that wages responded especially sluggishly during this downturn and that stickiness of wages contributed to the Great Recession's unusually high unemployment? Elsby, Shin, and Solon address these questions with data for both the United States and Great Britain.
In addition to the conference paper, the research was distributed as NBER Working Paper w19478, which may be a more recent version.
The high pace of output and input reallocation across producers is pervasive in the U.S. economy. Evidence shows this high pace of reallocation is closely linked to productivity. Resources are shifted away from low productivity producers towards high productivity producers. While these patterns hold on average, the extent to which the reallocation dynamics during recessions are "cleansing" remains an open question. That is, are recessions periods of increased reallocation that move resources away from lower productivity activities towards higher productivity uses? Or, are they periods when the opportunity cost of time and resources is low, implying that recessions will be times of accelerated productivity enhancing reallocation? Prior research suggests the recession in the early 1980s is consistent with an accelerated pace of productivity enhancing reallocation. Alternative hypotheses highlight the potential distortions to reallocation dynamics in recessions. Foster, Grim, and Haltiwanger note that such distortions might arise from many factors including, for example, distortions to credit markets. Some have suggested that these distortions are sufficiently large to attenuate the cleansing effect, or even to shift resources towards less productive activities. The close connection between the financial crisis and the Great Recession raises interesting questions about the importance of this hypothesis in the recent period.
Even before the Great Recession, U.S. employment growth was unimpressive. Between 2000 and 2007, the economy gave back the considerable jump in employment rates it had achieved during the 1990s, with major contractions in manufacturing employment being a prime contributor to the slump. The U.S. employment "sag" of the 2000s is widely recognized but poorly understood. Acemoglu, Autor, Dorn, Hanson, and Price explore an under-appreciated force contributing to sluggish U.S. employment growth: the swift rise of import competition from China. They find that the increase in U.S. imports from China, which accelerated after 2000, was a major force behind recent reductions in U.S. manufacturing employment and that through input-output linkages with the rest of the economy, this negative trade shock has helped suppress overall U.S. job growth.
What explains the current low rate of employment in the United States? While there has been substantial debate over this question in recent years, Beaudry, Green, and Sand believe that considerable added insight can be derived by focusing on changes in the labor market at the turn of the century. In particular, they argue that around the year 2000, the demand for skill (or, more specifically, for cognitive tasks often associated with high educational skill) underwent a reversal. Many researchers have documented a strong, ongoing increase in the demand for skills in the decades leading up to 2000. These researchers demonstrate a decline in that demand in the years since 2000, even as the supply of high-education workers continues to grow. They go on to show that, in response to this demand reversal, high-skilled workers have moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers. This deskilling process, in turn, results in high-skilled workers pushing low-skilled workers even further down the occupational ladder and, to some degree, out of the labor force all together. In order to understand these patterns, they offer a simple extension to the standard skill biased technical change model that views cognitive tasks as a stock rather than a flow. They show how such a model can explain the trends in the data that they present, and offer a novel interpretation of the current employment situation in the United States.
There are two obvious possibilities that can account for the rise in productivity during recent recessions. The first is that the decline in the workforce was not random, and that the average worker was of higher quality during the recession than in the preceding period. The second is that each worker produced more while holding worker quality constant. Lazear, Shaw, and Stanton call the second effect "making do with less" -- that is, getting more effort from fewer workers. Using data spanning June 2006 to May 2010 on individual worker productivity from a large firm, it is possible to measure the increase in productivity due to effort and sorting. For this firm, the second effect--that workers' effort increases-- dominates the first effect--that the composition of the workforce differs over the business cycle.
Disability insurance (DI) applications and awards are countercyclical. One possible explanation is that unemployed individuals who exhaust their Unemployment Insurance (UI) benefits use DI as a form of extended benefits. Rothstein exploits the haphazard pattern of UI extensions in the Great Recession to identify the effect of UI exhaustion on DI application, using both aggregate data at the state-month level and microdata on unemployed individuals in the Current Population Survey. He finds no indication that expiration of UI benefits causes DI applications. His estimates are sufficiently precise to rule out effects of meaningful magnitude.
Altonji, Kahn, and Speer analyze outcomes of college graduates as a function of the economic conditions they graduated into and the skill requirements of their field of study. They combine multiple datasets with information on earnings and field of study for U.S. college graduates graduating between 1976 and 2011. This provides coverage of multiple business cycles and larger sample sizes than the typical cohort-based analyses in this literature. They categorize college majors by indicators of skill in the majors, predominantly the average earnings premium. They then measure earnings, wage, employment, occupation, skill level, and educational attainment outcomes across graduation cohorts and major skill level. They find that early careers are disrupted by poor labor market conditions: a large recession at the time of graduation reduces earnings and wages by roughly 9 percent and 13 percent (respectively) in the first year, and reduces the probability of full-time employment by 11 percentage points. These effects are fairly short-lived, fading out over the first five years of a career or so. They also find that the earnings gap across college majors widens in recessions: a typically high-earning major increases his or her earnings advantage by one third when graduating in a bad recession, and this effect remains large for the first seven years after college graduation. There is some evidence of small, positive educational attainment effects even among low-return majors who are graduating into a less vibrant economy, but the authors find no effects on occupation quality. They also determine that differential cyclicality of college major cannot account for their findings. They compare their earnings and wage effects across recessions and find that overall earnings losses from poor entry conditions are substantially larger for graduates in the 2001 and 2007-9 recessions than in other periods, and these earnings losses are more evenly dispersed across college majors.
Lemieux and Hoffmann look at the surprisingly different labor market performance of the United States, Canada, and Germany in the Great Recession of 2008-9. Unlike real GDP, which dropped and recovered in a similar fashion in all three countries, the unemployment rate followed a very different path. It barely increased in Germany, increased and remained at stubbornly high levels in the United States, and increased moderately in Canada. More recent data also shows that, unlike in Germany and Canada, the U.S. unemployment rate remains largely above its pre-recession level. The authosr explore several possible explanations for this phenomenon, and conclude that large employment swings in the construction sector linked to the boom and bust in U.S. housing markets are a very important factor behind the different labor market performance of the three countries during the Great Recession. Looking at more recent years also suggests that the strong GDP performance of Germany since 2009 is another important explanation for the continuing decline in unemployment in that country.