ECON 426 Lecture Notes - Lecture 19: Aggregate Demand, Production Function, Reagan Era
13 Jun 2018
School
Department
Course
Professor
The Education Premium: a "race" between Demand and Supply
1.
Labor Market Polarization
2.
Why are there still so many jobs?
3.
Overview
Wages Across Education Groups and Skill-biased Technical Change
The education premium
has typically trended upwards, with a brief "pause" during the
1970s
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At the same time, there's been a marked shift towards a more educated workforce
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Is the demand for educated labor not downward sloping after all?
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Since 1963:
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Parsimonious: only a few types
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Flexible
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Build a model of Demand for Labor inputs of different types:
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Allow demand to shift over time
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Treat supply as exogenous
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The Education Premium: High School vs College
Depends only on relative wages for HS and C type labor
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Allows for technical change over time - smooth, regular change
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Specify the demand of HS vs. C labor:
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Potentially very complex with many different inputs
▪
Input demand will depend on all of input prices
▪
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Use an aggregate production function:
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Aggregate Demand for Different Input Types
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What do the production isoquants of Young and Old look like?
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What will relative wages of Young and Old be?
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Young and Old are Perfect Substitutes within Education
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(same for HS)
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And
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--> We can measure band cfrom the relative wages of Young and Old within Education and
write/measure
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Simplify Step 1: Perfect Substitutes
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Next:
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What does the MRS between depend on with and without this simplication?
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With weak separability, the relative wage of depends only on
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Simplify Step 2: Weak Separability
The parameter pdetermines the elasticity of substitution
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The parameter governs the overall relative demand for the two types of labor
▪
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A CES Production Function has:
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CES and Implied Demand
Taking Stock…
Lecture 19 - Trends in Earnings Inequality
Tuesday, March 27, 2018
3:19 PM
ECON 426 Page 1
Allows writing relative wages as a function of College and High School Labor only
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We will write an aggregate production function with College and High School types of Labor
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Simple functional form
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Simple way to incorporate time changes (technical changes)
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Constant Price Elasticity production functions (CES) simplify the problem further:
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Taking Stock…
The linear trend in demand embodies the assumption that technological progress proceeds slowly
and regularly
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What values of -- if any -- can fit the data?
○
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Implied Relative Demand
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Change in the Education Wage Premium 1963 - 2005
Holding the supply of two types of labor constant, relative wages will change by 2 percentage
points annually in favor of college educated labor
▪
Relative supply of high school to college type labor has to change by about 4% annually to
undo this
▪
What do these mean?
○
•
Education premium is likely to continue increasing since educational attainment doesn't rise fast
enough
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I projected out what I would expect to happen in the next 20 years based on current trends in education
and demographics:
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The Estimated Parameters
1980s - Reagan Era
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Proxied maybe by minimum wages
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Institutional changes?
•
By looking at 90/50 and 50/10 inequality measures, we might get an idea of which part of the market is
driving inequality
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What Else Could Drive the Observed Changes?
ECON 426 Page 2
Document Summary
The education premium: a race between demand and supply. Wages across education groups and skill-biased technical change. The education premium has typically trended upwards, with a brief pause during the. At the same time, there"s been a marked shift towards a more educated workforce. Build a model of demand for labor inputs of different types: Specify the demand of hs vs. c labor: Depends only on relative wages for hs and c type labor. Allows for technical change over time - smooth, regular change. Young and old are perfect substitutes within education. Input demand will depend on all of input prices. -> we can measure b and c from the relative wages of young and old within education and write/measure (same for hs) With weak separability, the relative wage of depends only on. The parameter p determines the elasticity of substitution. The parameter governs the overall relative demand for the two types of labor.
