Elsby and Shapiro: Stepping Off the Wage Escalator: A Theory of the Equilibrium Employment Rate

Michael W. L. Elsby and Matthew D. Shapiro (2008), "Stepping Off the Wage Escalator: A Theory of the Equilibrium Employment Rate" http://www.eief.it/it/files/2008/04/stepping-off-2008-04-01.pdf

Abstract: This paper develops a theory of equilibrium labor supply based on the lifelong return to work. This lifelong return to work is the product of the general wage level and the return to experience. The paper shows how the return to experience has different effects from general wage growth because it creates a wedge between the return to work and not working. The model of the paper thereby generates a powerful relationship between employment rates and productivity growth. Calculations based on the model are able to replicate the comovements in employment rates and productivity growth for low-skill workers in the United States.

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• Blanchard surveys various approaches to mapping productivity growth into wages. He concludes that these approaches “deliver, to a first order, long run neutrality of unemployment to productivity growth.” He points out that existing theories may have different implications for the short and medium run effects of productivity growth, but concludes our understanding of the link between productivity and employment is weak. “The truth is we do not know. And this is a serious hole in knowledge” (Blanchard, 2007, p.416)...

Comments

[Matt]

No one else?

I will take a shot. I think the bottom line here is unskilled workers are hired first and laid off first. At least, that is what I am getting from my first read of the paper.

I could be wrong, but that has never stopped me before.

One main effect of education is to lengthen your outlook, not because you can track more things but you track significant events, events that give longer term outlook. Why this is is a another matter, but the why is important because people, in general, can track, over time and space approximately the same number of events. (IQ distributions are smooth).

So, during the production surge in any cycle, at the peak events are happening rapidly, and the value of workers with short term outlooks is higher. Conversely in slow downs.

Why does the value of short term thinkers change, differentially faster than long term workers? A couple of different economic models should report the same result. A particular business will have power law like slopes on the front and back of the business cycle.

My speculation is this:

MV = PY

This looks like the monetary equation for the financial industry, but with a change of units it is the general form of the Hamiltonian energy cycle, and is should apply to any aggregate of the type we are talking. There should be an equivalent equation for the car and housing industry. It has power law slopes, so it will accelerate the differential value of outlook (it has a third moment).

If production ramps up as a power law, then one can see how short term outlook becomes very valuable fast. You needs someone who can track things on the factory floor, not someone in the ivory tower.

[Neal]

"Outsourcing, offshoring and productivity measurements in United States manufacturing", by Susan Houseman

(QUOTE)

While economic theory holds that improvement in a population’s standard
of living is directly tied to its productivity growth, one of the great puzzles of the American economy in recent years has been the fact that large productivity gains have not broadly benefited workers in the form of higher wages (Dew-Becker and Gordon, 2005; Yellen, 2006). A better understanding of what the productivity statistics actually measure potentially provides some answers to this puzzle. Although a number of economists have suggested that offshoring may partly explain why many Americans have not enjoyed real wage gains during this period of rapid productivity growth, a contribution of this article is to suggest a direct link between productivity measurement, offshoring and inequality. It is possible that because of poor measurement of imported intermediate inputs, especially services, productivity measures are inflated.

Moreover, productivity improvements from offshoring may largely measure
cost savings, not improvements in output per hour worked by American labour.
Productivity trends may be an indicator not of how productive American
workers are compared to foreign workers, but rather of how cost-uncompetitive many are vis-à-vis foreign labour. Although the productivity numbers may capture some net gains to the American economy from trade, there is no reason to believe that these gains will be broadly shared among workers. The very process of offshoring to cheap foreign labour places downward pressure on many domestic workers’ wages and simultaneously increases measured productivity through cost savings.

(end quote)

[Bram Cohen]

This graph seem to say the exact opposite of conventional theory. Productivity growth and unemployment seem to be inversely correlated, and if anything unemployment follows productivity growth rather than the other way around. It would sure be nice to believe the indications of this data rather than the conventional theory, because the conventional theory calls for hurting the economy to help with unemployment and hurting employment to help with the economy, both of which are unpleasant and ethically dubious things to do.

The logical conclusion from this graph is that one should have programs which foster high productivity growth, and assume that a healthy economy will naturally lead to low unemployment.