COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1645 Understanding Sectoral Labor Market Dynamics: Patrick Kline March 2008 This paper examines the response of employment and wages in the US oil
and gas field services industry to changes in the price of crude petroleum using a time
series of quarterly data spanning the period 1972-2002. I find that labor quickly
reallocates across sectors in response to price shocks but that substantial wage premia
are necessary to induce such reallocation. The timing of these premia is at odds with the
predictions of standard models-wage premia emerge quite slowly, peaking only as labor
adjustment ends and then slowly dissipating. After considering alternative explanations, I
argue that a dynamic market clearing model with sluggish movements in industry wide labor
demand is capable of rationalizing these findings. I proceed to structurally estimate the
parameters of the model by minimum distance and find that simulated impulse responses
match key features of the estimated dynamics. I also provide auxiliary evidence
corroborating the implied dynamics of some important unobserved variables. I conclude with
a discussion of the strengths and weaknesses of the model and implications for future
research. |
