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Why does trend growth affect equilibrium employment? A new explanation of an old puzzle

Publication Abstract

Elsby, Michael W.L., and Matthew D. Shapiro. 2012. "Why does trend growth affect equilibrium employment? A new explanation of an old puzzle." American Economic Review, 102(4): 1378-1413.

That the employment rate appears to respond to changes in trend growth is an enduring macroeconomic puzzle. This paper shows that, in the presence of a return to experience, a slowdown in productivity growth raises reservation wages, thereby lowering aggregate employment. The paper develops new evidence that shows this mechanism is important for explaining the growth-employment puzzle. The combined effects of changes in aggregate wage growth and returns to experience account for all the increase from 1968 to 2006 in nonemployment among low-skilled men and for approximately half the increase in nonemployment among all men.

DOI:10.1257/aer.102.4.1378 (Full Text)

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