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Educational attainment, unemployment, and wage inflation

  • Mary C. Daly
  • Osborne Jackson
  • Robert G. Valletta

We investigate the impact of rising educational attainment on wage inflation and the equilibrium (non-inflationary) rate of unemployment. Rising educational attainment may reduce wage pressures by shifting the composition of the labor force towards groups with lower equilibrium unemployment rates, or it may increase wage pressures through increased reliance on groups whose wages are relatively responsive to changes in unemployment. A measure of aggregate unemployment adjusted for changes in the age and education structure of the labor force performs well in Phillips curve estimates of the wage inflation process but does not substantially improve the ability to forecast wages or materially alter the estimates of the equilibrium unemployment rate. We also estimate models of wage inflation that are disaggregated by educational attainment and find that college-educated workers face a sharper trade-off between labor market tightness and wage growth than do other groups. We find that forecasts of wage inflation derived from the disaggregated relationships perform better than those from aggregate wage equations.

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Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (2007)
Issue (Month): ()
Pages: 49-61

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Handle: RePEc:fip:fedfer:y:2007:p:49-61
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  1. Lawrence H. Summers, 1986. "Why is the Unemployment Rate So Very High near Full Employment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 339-396.
  2. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
  3. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
  4. Martin Neil Baily & James Tobin, 1977. "Macroeconomic Effects of Selective Public Employment and Wage Subsidies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 511-544.
  5. Robert J. Gordon, 1981. "Inflation, Flexible Exchange Rates, and the Natural Rate of Unemployment," NBER Working Papers 0708, National Bureau of Economic Research, Inc.
  6. Orley Ashenfelter & John C. Ham, 1979. "Education, Unemployment and Earnings," Working Papers 501, Princeton University, Department of Economics, Industrial Relations Section..
  7. Thomas Lemieux, 2006. "Post-Secondary Education and Increasing Wage Inequality," NBER Working Papers 12077, National Bureau of Economic Research, Inc.
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