Earnings II: Sectoral Shocks and Aggregate Disturbances

This chapter represents a significant departure from Chapter 19, which also focused on earnings. Instead of examining how earnings are distributed across a given population of workers, we shall now examine how individual and aggregate earnings evolve over time. The central thesis that we shall explore is that firms and workers are regularly buffeted by an assortment of random shocks or disturbances— both good and bad—that potentially have significant ramifications for their earnings. Some shocks directly affect workers themselves. For instance, a worker who unexpectedly falls into ill health is one obvious case in point. A less obvious source of shocks is that the outcomes associated with investments in human capital (such as in education, job search, and migration) all have an inherent random—and therefore risky—element. Other shocks directly affect employers. They can usefully be classified according to their scope. An idiosyncratic shock is unique to a particular employer. For instance, an incompetent manager might bungle an important strategic decision, imperiling the firm’s survival (lowering the value of labor), or a major new customer might suddenly place a large order for the firm’s product (increasing the value of labor). A sectoral shock affects the large part of an entire industry or occupational category. For example, an increase in steel tariffs might benefit U.S. steel producers by insulating them from the rigors of foreign competition. Alternatively, the process of creative destruction—in which the emergence of new products precipitates the obsolescence of extant ones—stokes the fires of demand for those who possess the skills required by the new ascendent industries of the day, but quells the demand for those who are employed in the industries they eclipse.1 Finally, aggregate shocks simultaneously affect many industries and occupations. For example, a credit crunch—such as that witnessed during the near catastrophic 2008 financial meltdown—could force many firms into bankruptcy and lead to a recession or worse. L e a r n i n g O b j e c t i v e s