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

  • Michael W. L. Elsby
  • Matthew D. Shapiro

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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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 4 (June)
Pages: 1378-1413

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:4:p:1378-1413
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