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Wages and Unemployment in the United States: Reviving a Wage Gap Explanation

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  • Sebastián Claro

    ()
    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

Abstract

The unemployment path in the United States in the last forty years can be significantly explained by the evolution of excessive real wages. An estimation of the evolution of market-clearing wages is presented and its difference with observed average wages - the wage gap - is shown to track significantly the path of the unemployment rate. Aside from emphasizing unemployment as an involuntary phenomenon, the neoclassical nature of the labor demand function used casts doubts with respect to effectiveness of aggregate demand policies, contrasting with some natural rate theories whose labor demand side provides room for extensive demand shocks. In this context, a fall in real wages appears as the key mechanism to generate a rise in aggregate employment.

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Bibliographic Info

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 235.

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Date of creation: 2003
Date of revision:
Handle: RePEc:ioe:doctra:235

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Related research

Keywords: Unemployment; wage gap; labor demand;

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  1. Gordon, Robert J, 1995. "Is There a Trade-off between Unemployment and Productivity Growth?," CEPR Discussion Papers 1159, C.E.P.R. Discussion Papers.
  2. Barry Bosworth & George L. Perry, 1994. "Productivity and Real Wages: Is There a Puzzle?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 317-343.
  3. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
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