Heterogeneity, Technical Change, and the Evolution of the U.S. Labor Market

Abstract

This paper analyzes the evolution of the U.S. labor market by estimating a dynamic general equilibrium model that simultaneously accounts for changes in wages, employ- ment, and educational attainment in the U.S. from 1975 to 2010. The model features overlapping generations of individuals who self-select into education, employment, and occupations in an environment with competitive markets and exogenous demand and supply shifts. It departs from existing general equilibrium studies by adopting a rich characterization of heterogeneity in the form of continuous two-dimensional ability distributions. The model is fit to the Current Population Survey and successfully matches trends in the U.S. labor market. The estimated model reveals changes in the ability composition of the workforce. Using the model as a basis for experiments, I first quantify the impact of exogenous demand and supply forces and highlight their general equilibrium interactions. I then assess composition effects and highlight the importance of ability heterogeneity in shaping labor market outcomes. The paper con- tributes to a better understanding of U.S. labor market dynamics over the last four decades.