Looking Ahead: Young Men, Wage Growth, and Labor Market Participation

Abstract: Despite the long economic expansion, employment among young men is lower today than it was in the late 1960s. This decline has been largely driven by a 17 percentage point reduction in the proportion of high school dropouts working even a single week per year. One common explanation for this trend, declining real wages, ignores the fact that the value of working today depends on future returns to experience. This paper estimates a model of labor supply with returns to experience as an explanatory variable, using data from the Current Population Survey. The classic myopic labor supply model (in which only the current wage matters) is rejected in favor of one that includes forward-looking considerations, embodied in returns to experience. For high school dropouts, decreasing returns to experience explain 30 percent of the decline in participation between 1967 and 1977. Changes in wages do not explain any of this trend.