Wage equations and labour demand by education

This report presents new research on the labour market in a special version the macroeconomic model MODAG. New wage relations and demand functions are estimated using new knowledge and the latest available data. These relations are the basis for new projections of demand for labour until 2030, and the results are compared to the previous report on employment by education by Cappelen, Gjefsen, Gjelsvik, Holm and St.len (2013). The wage relations describing education-specific wage formation were previously estimated by Bj.rnstad and Skjerpen (2006), and Gjelsvik (2013) provided a documentation of the previous model of demand for labour by education and industry. The previous wage relations were constructed using data from 1972 to 1997, and the previous demand functions used data from 1972 to 2007.

Much has changed in the Norwegian economy since 1997, including the introduction of inflation targeting in 2001 and a surge in immigration since the expansion of EU in 2004. These incidents may have changed the bargaining power and the relative size of the different educational groups and may have affected the system of wage pattern bargaining. To account for these recent incidents, new equations are estimated to describe wage growth using data from 1972 to 2012. Compared to the previous results, wages above or below equilibrium will be counteracted more rapidly through reduced or increased wage growth. However, the group of workers with education corresponding to at least a Master degree can deviate from equilibrium for a longer time period. This difference in wage setting may affect the bargaining power and the degree of coordination in wage bargaining. In addition, the aggregation level of industries has changed since the previous estimations were constructed. To account for such changes, new cost shares representing demand for labour are estimated for three educational groups.

The model with new wage relations and demand functions is used to project demand for labour by education until 2030. The projections show that the previous trends of increasing demand for workers with tertiary education and upper secondary vocational education will continue. A decreasing share of demand is directed towards primary, lower secondary and upper secondary general education as the highest level of completed education. In addition, for employees with tertiary education, the projections show growth in demand for most educational fields, and particularly for candidates in economics and administration, as well as in nursing and social care.

To illustrate the importance of including immigration in the wage relations, a stylized shift in gross migration flow is conducted. The aim of this exercise is to illustrate the wage formation properties of the model. An increase in immigration by 15 000 people from 2015 to 2030, combined with an increase in the outflow of labour by 15000 from 2016 to 2030 is considered. Results show that this will reduce hourly wages by 4.1 percent in real terms in 2030 relative to the baseline scenario. This increases the employment rate, reduces unemployment and improves the competitiveness of the internationally exposed sector. The decline in real wages is so large that the impact of reduced consumption dominates the competition improvement and GDP decreases. The effect on the economy depends on the skill composition of the immigrants. The effect on the economy, i.e. the effect on GDP, is less negatively affected when the increase in supply has a skill distribution that is similar to the hosting country. One potential explanation is related to the degree of mismatch in the labor market, as reflected by the effect on unemployment. When the supply shock has the same skill composition as the host country each education-group experiences a reduction in unemployment. In contrast, when the supply shock has a skewed skill com-position the education-group that is directly affected experiences an increase in unemployment.

The model used for projection of demand for labour does not take into account the latest developments in oil price, petroleum investments and unemployment.

The last part of the report presents the latest developments and discusses how these may affect the projections until 2030. Changes in the composition of industries may affect demand for labour by education. Increasing activity in the building and construction industry is expected to increase the demand for workers with vocational education while decreasing activity in the petroleum sector reduces demand for some types of engineers.

Both for future students, employers and the authorities, projections on demand and supply of labour by different kinds of education are valuable information. Students must decide on which subjects to study, for employers it is important for long-term planning, and the authorities must plan educational capacity, industrial development and welfare reforms. In this respect it is interesting how increased immigration affects the composition of the labour force.