Unemployment, Unsatisfied Demand for Labor, and Compensation Growth in the United States, 1956-1980

50 Pages Posted: 27 Apr 2000 Last revised: 22 Aug 2021

See all articles by James L. Medoff

James L. Medoff

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Katharine G. Abraham

University of Maryland - Joint Program in Survey Methodology and Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 1981

Abstract

This paper presents two key facts which call into question the value of unemployment rates as barometers of labor market tightness. First, while both unemployment rates and unsatisfied labor demand proxies perform reasonably well on their own in compensation growth equations, in models which include both, only the unsatisfied demand variable appears to matter. Second, the past decade's outward shifts in Phillips plots can to a substantial degree be tied to outward shifts in plots pairing the relevant unemployment rate and unsatisfied demand proxies. The paper also provides results which indicate that Phillips relationships which are defined in terms of unsatisfied demand variables appear to be somewhat more stable than those using unemployment rates. Taken together, our findings have a clear message for those concerned with macroeconomic theory and policy: labor market pressure on wages can be more reliably assessed by looking at measures of unsatisfied labor demand than by looking at the unemployment rates on which most earlier analyses have focused.

Suggested Citation

Medoff, James L. and Abraham, Katharine G., Unemployment, Unsatisfied Demand for Labor, and Compensation Growth in the United States, 1956-1980 (October 1981). NBER Working Paper No. w0781, Available at SSRN: https://ssrn.com/abstract=227530

James L. Medoff (Contact Author)

Harvard University - Department of Economics ( email )

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Katharine G. Abraham

University of Maryland - Joint Program in Survey Methodology and Department of Economics ( email )

College Park, MD 20742
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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