Structural theories of unemployment, vindicated as part of the puzzle

From the new AER, by Michael Elsby and Matthew Shapiro:

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 lowskilled men and for approximately half the increase in nonemployment among all men.

You will find many weak structural theories criticized (at length) in the blogosphere, but the stronger versions hold up.  This is very likely one reason why the labor market and output response in recent years has been so weak.  It doesn’t require any stories about companies searching desperately for quality computer programmers, and so showing the generality of unemployment across professions or regions isn’t much of a response to the stronger structural theories.


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