The Low-Skilled Labor Market from 2002 to 2014: Measurement and Mechanisms

I analyze the evolution of the U.S. labor market from 2002 to 2014. The Great Recession’s employment declines fell disproportionately on groups with low levels of observable skills. Compositional changes lead averages to obscure downward movement in real wages over this time period. Traditional measures of wage inequality similarly tend to understate the relative decline in low-skilled individuals’ labor market opportunities. To understand the low-skilled labor market’s deterioration, I construct wage and employment counterfactuals that capture the distinctive predictions of leading institutions and markets-centric viewpoints. Institutions-centric counterfactuals, which emphasize weaknesses in workers’ bargaining positions, predict that this period’s minimum wage increases would have significantly increased the number of low-skilled individuals with wage rates near or below the minimum wage. The data are inconsistent with this prediction. By contrast, counterfactuals that emphasize the effects of trade, technology, and other competitive market forces are able to match long-run employment changes. My framework highlights that the minimum wage’s effects evolve with labor market conditions. In addition to their relatively direct effects, labor replacing developments in trade and technology exacerbate the minimum wage’s effects on employment. Importantly, this observation holds whether labor markets are competitive or subject to significant bargaining frictions at baseline.