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Chapter 3 The Macroeconomy and Determinants of the Earnings of Less-Skilled Workers Robert E. Hall P overty is a condition with multiple causes, but every analysis agrees on the importance of the earnings of less-skilled workers.1 Macroeconomic— that is, economywide—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 fifty 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 graduates with 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 fifty 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. The American economy has been quite successful in raising the wages of its workers measured in terms of the products that the country produces. For two reasons, it has been less successful in raising wages in terms of what people consume. First, the United States is a major producer of capital goods, especially computers and software, and rapid productivity growth in this area has driven / 89 Working and Poor down the prices of these products, which families consume in only small amounts. The services that account for a large part of consumption have become relatively more expensive. Second, the United States has suffered a long decline in its terms of trade with the rest of the world, partly resulting from increases in the price of oil. People consume imported products that have become gradually more expensive in relation to domestically produced products. The 1990s saw some relief from this trend, but it was substantial in the 1980s and resumed after 2000. The real earnings of the least-skilled workers—here taken to be those who did not finish high school—rose by about 1.5 percent per year in the boom years of 1992 to 2000, after stagnating in the previous boom of 1982 to 1990. In addition to the factors that caused earnings in general to rise, this group enjoyed an unusual increase in demand associated with the expansion of industries, such as construction and auto repair, that hire large proportions of the least-educated. And the number of people in the United States who had not graduated from high school fell by 1.3 percent per year. Stagnant earnings of low-skilled workers coincided with increases in the incidence of poverty in the 1980s, while improvements in their earnings in the 1990s coincided with modest declines in the incidence of poverty. A long-term trend toward higher educational attainment contributed to improvements in the distribution of income at all times. Nonetheless, poverty was just as frequent in 2003 as it was in 1975. Factors that may account for the difference are outside the province of macroeconomics; they include increases in the dispersion of earnings within skill groups and the growing tendency for individuals to live by themselves , sacrificing the economies of living in larger households. The business cycle is an important and enduring feature of the macroeconomy. Measured in terms of output, the cycle comprises a sharp and brief contraction followed by a long period of expansion. Usually output growth is highest just after the contraction, as the economy rebounds from the shock that caused the recession in the first place. Over U.S. history, recessions have occurred about twice a decade, but the frequency has been once a decade over the past thirty years. In the labor market, employment falls...

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