Journal Issue
IMF Working Paper Summaries (WP/95/1 - WP/95/61)

Summary of WP/95/37: “The Employment and Wage Effects of Oil Price Changes: A Sectoral Analysis”

International Monetary Fund
Published Date:
August 1995
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This paper uses micro panel data to examine the effects of oil price changes on employment and real wages in the United States, at the aggregate and industry levels. The paper also measures differences in the employment and wage responses to oil price changes for workers differentiated by skill level. Using a panel data set with detailed worker characteristics enables the efficient estimation of econometric models that correct for various sources of aggregation and selectivity bias.

The main finding of the paper is that oil price increases result in substantial wage declines in virtually all sectors of the economy. However, the magnitude of these wage declines varies considerably by industry and, within each industry, by skill level. On average, real wages fall between 3 and 4 percent in the long run following a single standard deviation around trend increase (approximately 19 percent) in the real price of refined petroleum products. However, oil price increases also result in an increase in the relative wage of skilled workers. The use of panel data econometric techniques to control for unobserved heterogeneity is essential to uncover this result, which is completely hidden in OLS estimates. The results also indicate that changes in labor force composition induced by oil price changes produce substantial bias in estimates of average wage effects based on aggregate data.

Oil price increases are found to reduce aggregate employment in the short run and shift industry employment shares in the long run. The long-run effect of an oil price increase on aggregate employment is positive, possibly indicating substitution between energy and labor in the aggregate production function. These results are consistent with the sectoral shift models of unemployment of Lilien (1982), Hamilton (1988), and others. An additional prediction of sectoral shift models is that workers tend to move toward those sectors where the relative productivity of labor (as reflected in wages) increases following a real shock, A comparison of estimated changes in industry relative wages and employment shares reveals little support for this prediction.

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