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The Employment and Wage Effects of Oil Price Shocks: A Sectoral Analysis

Discussion Paper 51 | Published September 1, 1991

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Authors

Eswar S. Prasad

Michael P. Keane

The Employment and Wage Effects of Oil Price Shocks: A Sectoral Analysis

Abstract

In this paper we use micro panel data to examine the effects of oil price shocks on employment and real wages, at the aggregate and industry levels. We also measure differences in the employment and wage responses for workers differentiated on the basis of skill level. We find that oil price increases result in a substantial decline in real wages for all workers, but raise 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. While the short-run effect of oil price increases on aggregate employment is negative, the long-run effect is negligible. We find that oil price shocks induce substantial changes in employment shares and relative wages across industries. However, we find little evidence that oil price shocks cause labor to flow into those sectors with relative wage increases.


Published In: Review of Economics and Statistics (Vol. 78, No. 3, August 1996, pp. 389-400) https://doi.org/10.2307/2109786