INTER-INDUSTRY WAGE DIFFERENTIALS: Empirical Evidence 3

Trends and Cycles in Hours and Employment

We are concerned that some of these shifts in the wage-effort offer curve may be associated with the business cycle. The unit of time to which the wage-effort offer curve applies is the implicit contract period which may be a worker lifetime and which almost certainly covers the business cycle. If a business cycle defines the time unit, then the capital/labor ratio should be the capital stock divided by peak employment. In addition, both earnings and hours should refer to the whole cycle not to a subset of time within a cycle.

When we use annual data, the measured capital intensity is inappropriately high at the trough of the cycle when employment is low. When we use annual data we overestimate the effort level and the wages since we do not account for the idleness of workers at the trough. For these reasons, we worry that when we trace out the apparent wage-effort offer curve over time we may think that we see shifting offers when all that is happening is a business cycle.

Figure 3.2 shows how closely the employment rate and average weekly hours move together over time, with hours worked leading the cycle in employment. Average hours peaked at over 41 hours in the late sixties when unemployment was down to less than 4%. Average hours bottomed out at slightly over 39 hours in the late fifties and again in the early eighties when unemployment rates were measured at 7% and 10% respectively.

Figure 3.2: Average Employment Rates and Hours- Production Workers
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We note the run-up in average hours in the late eighties and early nineties to peak levels and the corresponding increase in the rate of employment to high levels but not to the historically high levels seen in the mid-sixties. This seems to imply that there has been some distinct break between these two series occurring in the early eighties. We find this increase to be endemic across all industries in the NBER data. We are inclined to attribute this to a reaction to an increase in benefits which are paid on a per-worker basis not a per-hour basis. Firms thus save on costs of benefits by increasing hours. But the introduction of new highly expensive and very expensive equipment can have a similar effect. payday loans with no credit check

Cycles and trends are eliminated by subtracting the overall average from the sectoral hours data displayed in Figures 3.3a and 3.3b. The high hours sectors in 1993 are displayed in panel a and the low hours sectors in panel b. For example a worker in apparel (in Figure 3.3b) worked about 4 hours less compared to the average production worker. This value has remained steady over the 45 years mapped out here. On the top is the paper industry where a worker works about 2.5 more hours per week than the average production worker.