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Title: Skill Heterogeneity and Aggregate Labor Market Dynamics
Citation Type: Miscellaneous
Publication Year: 2019
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Abstract: What determines the joint dynamics of aggregate employment and wages over the medium run? This classic question in macroeconomics has received renewed attention since the Great Recession, when real wages did not fall despite a crash in employment. This paper proposes a microfoundation for the medium-run dynamics of aggregate labor markets which relies on worker heterogeneity. I develop a model in which workers differ in their skills for various occupations, sectors employ occupations with different weights in production, and skills are imperfectly transferable. When shocks are concentrated in particular industries, the extent to which workers can reallocate across the economy determines aggregate labor market dynamics. I apply the model to study the recessions of 2008-09 and 1990-91. I estimate the distribution of worker skills using two-period panel data prior to each of these recessions and find that skills became less transferable between the 1980s and 2000s. Shocking the estimated model with industry-level TFP series replicates the increase in aggregate wages in 2008-09, and decline in 1990-91. The model implies that if either the composition of industry shocks or the distribution of skills in the economy had been the same in the 2008-09 recession as in the 1990-91 recession, real wages would have fallen, while employment would have declined less. The declining industries during 2008-09 all employed a similar mix of skills, which induced many low-skill workers to leave the labor force and limited downward wage pressure on the rest of the economy. Finally, the model inspires a novel reduced form method to correct aggregate wages for selection in the human capital of workers, which accounts for cyclical job downgrading by focusing on the wage movements of occupation-stayers. This correction recovers pro-cyclical wages, suggesting the changing composition of the workforce was crucial for aggregate wage dynamics during the Great Recession.
Url: http://home.uchicago.edu/~jgrigsby/files/Research/JGrigsby_JMP.pdf
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Authors: Grigsby, John
Publisher: University of Chicago
Data Collections: IPUMS USA
Topics: Labor Force and Occupational Structure
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