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The Macroeconomy and Determinants of the Earnings of Less-Skilled Workers

September 2005

Robert E. Hall, Hoover Institution and Department of Economics, Stanford University, National Bureau of Economic Research.

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Poverty is a condition with multiple causes, but every analysis agrees on the importance of the earnings of less-skilled workers. Macroeconomic—that is, economy-wide—influences determine average earnings. This chapter looks at data from the U.S. economy through the lens of macroeconomics. Some of the key questions I consider are: How much have wages in general risen over the past 50 years, in terms of the value of what workers produce and what workers consume? How has productivity growth and rising stocks of plant and equipment contributed to wage growth in general? How have wages of workers at the bottom of the skill distribution (those who did not finish high school), in the middle (high school but no college), and at the top (college graduates) changed over time? What has happened to the demand for workers in these skill groups? What has happened to the fraction of Americans living in poverty as wages have risen? What happens to workers in the various skill groups when employment falls sharply in a recession? I break down the macroeconomic determinants of earnings into those that affect all workers and those that operate differently by education group. Economic analysis points to two fundamental factors that affect average wage growth—productivity growth and capital deepening, that is, the accumulation of additional plant and equipment per worker. Both have been important over the past 50 years. Productivity growth in the 1990s was lower than in almost any other period, but capital deepening added to wage growth, and wages significantly outperformed the neoclassical benchmark, so total wage growth was impressive...

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