Wages and Unemployment in the United States: Reviving a Wage Gap Explanation

The unemployment path in the United States in the last forty years can be significantly explained by the evolution of excessive real wages. An estimation of the evolution of market-clearing wages is presented and its difference with observed average wages - the wage gap - is shown to track significantly the path of the unemployment rate. Aside from emphasizing unemployment as an involuntary phenomenon, the neoclassical nature of the labor demand function used casts doubts with respect to effectiveness of aggregate demand policies, contrasting with some natural rate theories whose labor demand side provides room for extensive demand shocks. In this context, a fall in real wages appears as the key mechanism to generate a rise in aggregate employment.