Supply shocks and the factor price frontier: Labour market adjustment in the United States and Germany

Based on the factor price frontier, we investigate the effects of supply shocks ort labour markets in open economies. Two different supply shocks are considered: an oil price shock, and the integration of relatively labour-abundant countries into the world economy. With flexible wages, a negative supply shock leads to a decrease in the wage rate while employment remains constant. With a rigid wage rate, a rise in unemployment of unskilled labour follows. The model explains the shift of relative labour demand towards skilled labour. The theoretical results are confirmed by our estimation of the factor price frontier for the United States and Germany.