Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 651: Labor Supply Dynamics, Unemployment and Human Capital Investments

Etienne Wasmer
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Etienne Wasmer: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden

Abstract: In the last decades, the OECD labor markets faced important labor supply changes with the arrival of women and the cohorts of the baby-boom. Using a survey where workers declare their true employment experience, this paper argues that the supply trend can be equivalent to a trend of more inexperienced workers. The paper proposes to investigate the potentially important consequences of the dynamics of labor supply trends on the skill composition of the labor force, between-groups wage inequality and the level of unemployment. The mechanism highlighted here is that, in periods of sustained growth of of the active population, the labor force is younger and less experienced, which may increase the wage return to 'experience' and lead to higher unemployment among low-experience workers. They do not accumulate enough on-the-job human capital, and this reduces in the long run the supply of skilled workers and the demand for unskilled workers. This intertemporal multiplication of supply shocks generates multiple equilibria. When human capital investment decisions are introduced, low-experience groups try to improve their outcome on the labor market; new cohorts invest in education, women invest in on-the-job skills.

Keywords: Wage inequality; Education; Experience; Labor Supply

JEL-codes: E24; J21; J31

43 pages, September 1, 1998

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