Finance and Economics Discussion Series (FEDS)
May 2001
Looking Ahead: Young Men, Wage Growth, and Labor Market Participation
Abstract:
Despite the current economic boom, employment among young men is lower today than it was in the late 1960s. This decline has been largely driven by a 17 percentage point reduction in the proportion of young high school dropouts working even a single week per year. One common explanation for this trend, declining real wages, ignores the fact that the value of working today depends on future returns to experience, particularly for young workers. Since both wage levels and returns to experience have varied considerably over time and have different policy implications, this paper examines their relative importance. Specifically, I estimate a model of labor supply with returns to experience as an explanatory variable using data on cohorts of young workers from the Current Population Survey. For young people, the classic myopic labor supply model (in which only the current wage matters) is rejected in favor of one that includes forward-looking considerations, embodied in returns to experience. For high school dropouts, decreasing returns to experience explain 30% of the decline in participation between 1967 and 1977. Changes in wages do not explain any of this trend. During the 1980s, declining wages result in an underprediction in the annual participation of college graduates. Rising wage growth rates explain the higher rates of participation.
Keywords: Labor supply, wage growth, labor force trends
PDF: Full Paper
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