The Effect of Industry-Level Aggregate Demand on Earnings: Evidence from the US

Abstract

Economic theory suggests that workers’ pay is mainly determined by their marginal product and that industry wage differentials may result either from the structure of the industry (demand type factors) or human capital characteristics of the employed labour force (supply type factors). This study uses a major data set from the US that allows the investigation of the effects of these demand and supply type factors on average earnings across industries. Importantly, this paper shows that aggregate demand relevant to the particular industry has a strong positive effect on the industry’s average earnings in addition to the previously established results regarding the significance of the effects of worker and firm characteristics. Consequently, labour market policies crafted without due consideration of macroeconomic demand may be ineffective as a solution to the proliferation of low pay employment.