Educational Attainment, Unemployment, and Wage Inflation

The U.S. labor force has undergone significant changes during the past several decades. Compared to 30 years ago, the average worker today is older, more likely to be female, and more educated. A key question for macroeconomic forecasters and policymakers is whether and to what extent these changes have influenced the values and patterns of key aggregate measures of economic performance such as the unemployment rate and wage inflation. While considerable research has documented the importance of changing age structure and the entry of women for labor market outcomes, much less is known about the influence of educational attainment on these variables. In this paper, we examine how changes in the educational attainment of the U.S. labor force may affect aggregate labor market outcomes and whether these effects are sufficiently large to warrant ongoing attention from researchers. Following past research that examined the effects of changes in age structure on unemployment and wage inflation, we consider two basic methods for incorporating educational attainment into models of wage inflation. Our empirical investigation begins with an adjustment to the aggregate unemployment rate based on rising educational attainment, which appears empirically valid but does not alter predictions of wage inflation obtained from aggreEducational Attainment, Unemployment, and Wage Inflation*