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Accounting for Wage and Employment Changes in the U. S. from 1968-2000: A Dynamic Model of Labor Market Equilibrium

  • Donghoon Lee

    ()

    (Department of Economics, New York University)

  • Kenneth I. Wolpin

    ()

    (Department of Economics, University of Pennsylvania)

In this paper, we present a unified treatment of and explanation for the evolution of wages and employment in the U.S. over the last 30 years. Specifically, we account for the pattern of changes in wage inequality, for the increased relative wage and employment of women, for the emergence of the college wage premium and for the shift in employment from the goods to the service-producing sector. The underlying theory we adopt is neoclassical, a two-sector competitive labor market economy in which the supply of and demand for labor of heterogeneous skill determines spot market skill-rental prices. The empirical approach is structural. The model embeds many of the features that have been posited in the literature to have contributed to the changing U.S. wage and employment structure including skill-biased technical change, capital-skill complementarity, changes in relative product-market prices, changes in the productivity of labor in home production and demographics such as changing cohort size and fertility.

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File URL: http://economics.sas.upenn.edu/system/files/working-papers/06-005.pdf
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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 06-005.

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Length: 62 pages
Date of creation: 01 Sep 2005
Date of revision: 02 Jan 2006
Handle: RePEc:pen:papers:06-005
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  1. Robert E. Baldwin & Glen G. Cain, 1997. "Shifts in U.S. Relative Wages: The Role of Trade, Technology and Factor Endowments," NBER Working Papers 5934, National Bureau of Economic Research, Inc.
  2. 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.
  3. David Card & John E. DiNardo, 2002. "Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," Journal of Labor Economics, University of Chicago Press, vol. 20(4), pages 733-783, October.
  4. Andreas Hornstein & Per Krussell & Giovanni L. Violante, 2004. "The effects of technical change on labor market inequalities," Working Paper 04-08, Federal Reserve Bank of Richmond.
  5. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
  6. Victor R. Fuchs, 1968. "The Service Economy," NBER Books, National Bureau of Economic Research, Inc, number fuch68-1, June.
  7. Donghoon Lee & Matthew Wiswall, 2007. "A Parallel Implementation of the Simplex Function Minimization Routine," Computational Economics, Society for Computational Economics, vol. 30(2), pages 171-187, September.
  8. Zvi Eckstein & Éva Nagypál, 2004. "The evolution of U.S. earnings inequality: 1961?2002," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Dec, pages 10-29.
  9. Michael P. Keane & Kenneth I. Wolpin, 1994. "The solution and estimation of discrete choice dynamic programming models by simulation and interpolation: Monte Carlo evidence," Staff Report 181, Federal Reserve Bank of Minneapolis.
  10. Peter Gottschalk & Robert Moffitt, 1994. "The Growth of Earnings Instability in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 217-272.
  11. Casey B. Mulligan & Yona Rubinstein, 2005. "Selection, Investment, and Women's Relative Wages Since 1975," NBER Working Papers 11159, National Bureau of Economic Research, Inc.
  12. Donghoon Lee & Kenneth I. Wolpin, 2006. "Intersectoral Labor Mobility and the Growth of the Service Sector," Econometrica, Econometric Society, vol. 74(1), pages 1-46, 01.
  13. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
  14. Finis Welch, 2000. "Growth in Women's Relative Wages and in Inequality among Men: One Phenomenon or Two?," American Economic Review, American Economic Association, vol. 90(2), pages 444-449, May.
  15. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
  16. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352.
  17. James Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explanations With A Dynamic General Equilibrium Model of Labor Earnings With Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 1-58, January.
  18. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2005. "Trends in U.S. Wage Inequality: Re-Assessing the Revisionists," NBER Working Papers 11627, National Bureau of Economic Research, Inc.
  19. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February.
  20. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
  21. Altug, Sumru & Miller, Robert A, 1998. "The Effect of Work Experience on Female Wages and Labour Supply," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 45-85, January.
  22. Heckman, James J & Sedlacek, Guilherme, 1985. "Heterogeneity, Aggregation, and Market Wage Functions: An Empirical Model of Self-selection in the Labor Market," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1077-1125, December.
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