Washington Post Death Spiral Watch
links for 2008-04-25

Elsby and Shapiro: Stepping Off the Wage Escalator: A Theory of the Equilibrium Employment Rate

Michael W. L. Elsby and Matthew D. Shapiro (2008), "Stepping Off the Wage Escalator: A Theory of the Equilibrium Employment Rate" http://www.eief.it/it/files/2008/04/stepping-off-2008-04-01.pdf

Abstract: This paper develops a theory of equilibrium labor supply based on the lifelong return to work. This lifelong return to work is the product of the general wage level and the return to experience. The paper shows how the return to experience has different effects from general wage growth because it creates a wedge between the return to work and not working. The model of the paper thereby generates a powerful relationship between employment rates and productivity growth. Calculations based on the model are able to replicate the comovements in employment rates and productivity growth for low-skill workers in the United States.

  • Blanchard surveys various approaches to mapping productivity growth into wages. He concludes that these approaches “deliver, to a first order, long run neutrality of unemployment to productivity growth.” He points out that existing theories may have different implications for the short and medium run effects of productivity growth, but concludes our understanding of the link between productivity and employment is weak. “The truth is we do not know. And this is a serious hole in knowledge” (Blanchard, 2007, p.416)...