American Economic Review Vol. 102 No. 4 2012

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

Michael Elsby¹; Matthew D. Shapiro²

¹ School of Economics, University of Edinburgh, 31 Buccleuch Place, Edinburgh, EH8 9JT, United Kingdom, and National Bureau of Economic Research. · ² Department of Economics, University of Michigan, Ann Arbor, MI 48109, and National Bureau of Economic Research.

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.

DOI

10.1257/aer.102.4.1378

Volume

102

Issue

4

Pages

1378-1413

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓