Understanding Sectoral Labor Market Dynamics: An Equilibrium Analysis of the Oil and Gas Field Services Industry

This paper examines the response of employment and wages in the US oil and gas …eld services industry to changes in the price of crude petroleum using a time series of quarterly data spanning the period 1972-2002. I …nd 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 …ndings. I proceed to structurally estimate the parameters of the model by minimum distance and …nd 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. I am deeply indebted to Chris House for sharing with me the art of formulating and solving dynamic models. I would also like to thank Joe Altonji, John Bound, Charlie Brown, Matias Busso, Kerwin Charles, Michael Elsby, Yuriy Gorodnichenko, Ben Keys, Justin McCrary, Matthew Shapiro, Gary Solon, and Robert Willis for useful comments and corrections. This paper bene…tted greatly from the comments of seminar participants at Harvard, MIT, Yale, Chicago, Princeton, Stanford, Boston University, Brown, Wharton, Northwestern, Berkeley, San Diego, and Duke. All errors are my own.