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

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?

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

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

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

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

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

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?

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

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

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

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

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)

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

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

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

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

State Labor Quality in 2001

Summary Worker quality growth is slowing due to less favorable demographic trends Midwest as a whole very similar to the U.S. (Very) modest evidence of the importance of worker quality for gross state product