According to standard economic models, adverse demand shocks will lead to bigger
employment losses if institutional factors like minimum wages and trade unions prevent real
wages from falling. Some economists have argued that this insight explains the contrast
between the United States, where real wages fell over the 1980s and aggregate employment
expanded vigorously, and Europe, where real wages held steady and employment was
stagnant. We test the hypothesis by comparing recent changes in wages and employment
rates for different age and education groups in the United States, Canada, and France. We
argue that the same forces that led to falling real wages for less-skilled workers in the U.S.
also affected Canada and France. Consistent with the view that labor market institutions in
Canada and France reduce wage ﬂexibility, we ﬁnd that the relative wages of less-skilled
workers fell more slowly in Canada than the U.S. during the 1980s, and did not fall at all in
France. Contrary to expectations, however, we ﬁnd little evidence that wage inﬂexibilities
generated divergent patterns of relative employment growth across the three countries.
We use comparable micro data sets for the U.S. and Canada to study the responses of young
workers to the extemal labor market forces that have affected the two countries over the past 25
years. We ﬁnd that young workers adjust to changes in labor market opportunities through a
variety of mechanisms, including changes in living arrangements, changes in school enrollment,
and changes in work effort. In particular, we ﬁnd that poor labor market conditions in Canada
explain why the fraction of youth living with their parents has increased in Canada relative to the
U.S. recently. Paradoxically, this move back home also explains why the relative position of
Canadian youth in the distribution of family income did not deteriorate as fast as in the U.S.
During the 1980s wage differentials between younger and older
workers and between more and less educated workers expanded
rapidly. Wage dispersion among individuals with the same age
and education also rose. A simple explanation for both sets of
facts is that earnings represent a return to a one-dimensional
index of skill, and that the rate of return to skill rose over
We explore a simple method for estimating and testing ‘single
index’ models of wages. Our approach integrates 3 dimensions
of skill: age, education, and unobserved ability. We find that
a one-dimensional skill model gives a relatively successful
account of changes in the structure of wages for white men and
women between 1979 and 1989. We then use the estimated models
for whites to analyze recent changes in the relative wages of
black men and women.
This paper provides an introduction and "user guide" to Regression Discontinuity (RD) designs for empirical researchers. It presents the basic theory behind the research design, details when RD is likely to be valid or invalid given economic incentives, explains why it is considered a "quasi-experimental" design, and summarizes different ways (with their advantages and disadvantages) of estimating RD designs and the limitations of interpreting these estimates. Concepts are discussed using using examples drawn from the growing body of empirical research using RD.