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Understanding Sectoral Labor Market Dynamics: An Equilibrium Analysis of the Oil and Gas Field Services Industry

This paper examines the response of employment and wages in the US oil and gas field services industry to changes in the price of crude petroleum using a time series of quarterly data spanning the period 1972-2002. I find that labor quickly reallocates across sectors in response to price shocks but that substantial wage premia are necessary to induce such reallocation. The timing of these premia is at odds with the predictions of standard models-wage premia emerge quite slowly, peaking only as labor adjustment ends and then slowly dissipating. After considering alternative explanations, I argue that a dynamic market clearing model with sluggish movements in industry wide labor demand is capable of rationalizing these findings. I proceed to structurally estimate the parameters of the model by minimum distance and find that simulated impulse responses match key features of the estimated dynamics. I also provide auxiliary evidence corroborating the implied dynamics of some important unobserved variables. I conclude with a discussion of the strengths and weaknesses of the model and implications for future research.

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File URL: http://cowles.econ.yale.edu/P/cd/d16a/d1645.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1645.

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Length: 44 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:cwl:cwldpp:1645
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Web page: http://cowles.econ.yale.edu/

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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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