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Labor Supply Dynamics, Unemployment and Human Capital Investments

In the last decades, the OECD labor markets faced important labor supply changes with the arrival of women and the cohorts of the baby-boom. Using a survey where workers declare their true employment experience, this paper argues that the supply trend can be equivalent to a trend of more inexperienced workers. The paper proposes to investigate the potentially important consequences of the dynamics of labor supply trends on the skill composition of the labor force, between-groups wage inequality and the level of unemployment. The mechanism highlighted here is that, in periods of sustained growth of the active population, the labor force is younger and less experienced, which may increase the wage return to 'experience' and lead to higher unemployment among low-experience workers. They do not accumulate enough on-the-job human capital, and this reduces in the long-run the supply of skilled workers and the demand for unskilled workers. This intertemporal multiplication of supply shocks generates multiple equilibria. When human capital investment decisions are introduced, low-experience groups try to improve their outcome on the labor market; new cohorts invest in education, women invest in on-the-job skills.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0411.

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Date of creation: Nov 1998
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Handle: RePEc:cep:cepdps:dp0411
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  1. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
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  4. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
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  8. Etienne Wasmer, 2004. "Labour Supply Dynamics, Unemployment and Human Capital Investments," Sciences Po publications info:hdl:2441/8943, Sciences Po.
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  11. Gilles Saint-Paul, 1993. "On the Political Economy of Labor Market Flexibility," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 151-196 National Bureau of Economic Research, Inc.
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  13. Pissarides, C., 1988. "Unemployment Consequences Of An Aging Population: An Application Of Insider-Outsider Theory," Papers 327, London School of Economics - Centre for Labour Economics.
  14. McVicar, Duncan & Rice, Patricia, 2000. "Participation in further education in England and Wales: an analysis of post-war trends," Discussion Paper Series In Economics And Econometrics 0014, Economics Division, School of Social Sciences, University of Southampton.
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  18. de la Croix, David & Docquier, Frédéric, 2003. "Diverging Patterns of Education Premium and School Attendance in France and the US: A Walrasian View," IZA Discussion Papers 846, Institute for the Study of Labor (IZA).
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