Recent Trends in Worker Quality: A Midwest Perspective

1. Recent Trends in Worker Quality:A Midwest Perspective Daniel Aaronson and Daniel Sullivan Federal Reserve Bank of Chicago November 2002

2. Worker Quality • AKA Worker Composition • Quantifies impact on labor productivity of certain aspects of the human capital stock • Years of Education • Years of Potential Experience • Sex • Other factors?

3. Worker Quality • One of several factors underlying labor productivity growth • Accounts for 0.22 of 2.7 percent average growth in labor productivity since 1967 • Drives wages as well • May be influenced by public policies

4. Worker Quality Methodology • Basic assumption is that variation in wages across workers reflects productivity • Can use cross-sectional data to quantify the impact of worker characteristics on wages • Implies we can quantify the productivity impact of changes over time in the distribution of worker characteristics

5. Methodological Caveats • Misses all but the most gross variation in education and work experience • Year at Harvard = Year at Community College • Wages may not equal productivity • Discrimination, signaling, rat race, etc • Misses externalities from education • workers may not capture the full benefits their of education

6. Preview of Results • Labor quality growth varies over time • Relatively rapid in late 1980s and early 1990s (0.5 percentage points per year) • Recently about half that fast • Labor quality growth likely to slow further • Education levels will be rising more slowly • Baby boomers will be going over the hill

7. Midwest • Very similar to the nation as a whole • Recently caught up to nation in education • Somewhat better than nation on experience • Overall, slightly above nation in level • Modestly faster growth over last 20 years

8. U.S. Educational Attainment • Very large increases over the last century • Rapid increases in early 1970s and 1980s • Driven by entrance of large baby-boom cohorts • Slowing somewhat since then • Less favorable demographics offset increases in enrollment rates • Significant role for adult education?

10. Current Population Survey • Monthly “mini census” • March Annual Demographic Files • At least 50,000 households per year • Available (conveniently) since 1964 • Outgoing Rotation Groups (Earner Study) • At least 150,000 households per year • Available since 1979

17. U.S. Age Distribution • Average age of workers rose over the last century • Average age declined significantly with entry of baby boom • Started rising again in the mid 1980s • Soon we will see a falling share of prime-age workers

20. Age Distribution • Mean is not a sufficient statistic • Wages first rise, then eventually fall with work experience • Define • Young: Under 30 • Prime age: 30-54 • Old: 55 and and up

24. Other Workforce Characteristics • Rising fraction of work force is female • Minority share is growing • Midwest has lower share of minorities • Fraction married is shrinking • Midwest somewhat above average • Unionization is declining • Midwest much higher than average

29. Labor Quality Methodology • Estimate regression model for logarithm of wages as a function of • Education (< HS, HS only, Some College, College, Post-graduate) • Potential experience (Age minus years of education) interacted with sex • Other variables (Race, Marital status, etc)

32. Labor Quality Methodology • Predict wages of sampled workers at time t0 and time t1 using time t0 regression • Calculate ratio of average predicted wages in the two periods • Repeat using time t1 regression • Take geometric average to get growth rate of worker quality from t0 to t1

33. Labor Quality Methodology • For some calculations we use a single regression model estimated in the middle (1980) year of period • Get predicted level of wages for a region in a particular year assuming the national structure of wages in 1980

34. Forecast Methodology • Take as given Census Bureau forecasts of population over the decade • Estimate a model of educational attainment as a function of age, cohort and demographic characteristics • Extrapolate to get educational propensities for cohorts not yet in the data

35. Forecast Methodology • Estimate model of labor force participation as a function of age, cohort, demographic characteristics, and educational attainment • Extrapolate to get labor force participation propensity for cohorts not yet in the data • Evaluate the predicted worker distributions of characteristics using regression model for last time period

44. State Labor Quality in 2001