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

Michael Elsby | Zendy; Matthew D. Shapiro | Zendy

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

Author(s) -

Michael Elsby,

Matthew D. Shapiro

Publication year - 2012

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.102.4.1378

Subject(s) - economics , wage , slowdown , wage growth , productivity , affect (linguistics) , labour economics , reservation , monetary economics , macroeconomics , economic growth , linguistics , philosophy , political science , law

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)

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