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Measuring What Employers Really Do about Entry Wages over the Business Cycle

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  • Martins, Pedro S.

    (Universidade Nova de Lisboa)

  • Solon, Gary

    (University of Michigan)

  • Thomas, Jonathan P.

    (University of Edinburgh)

Abstract

In models recently published by several influential macroeconomic theorists, rigidity in the real wages that firms pay newly hired workers plays a crucial role in generating realistically large cyclical fluctuations in unemployment. There is remarkably little evidence, however, on whether employers' hiring wages really are invariant to business cycle conditions. We review the small empirical literature and show that the methods used thus far are poorly suited for identifying employers’ wage practices. We propose a simpler and more relevant approach – use matched employer/employee longitudinal data to identify entry jobs and then directly track the cyclical variation in the real wages paid to workers newly hired into those jobs. We illustrate the methodology by applying it to data from an annual census of employers in Portugal over the period 1982-2007. We find that real entry wages in Portugal over this period tend to be about 1.8 percent higher when the unemployment rate is one percentage point lower. Like most recent evidence on other aspects of wage cyclicality, our results suggest that the cyclical elasticity of wages is similar to that of employment.

Suggested Citation

  • Martins, Pedro S. & Solon, Gary & Thomas, Jonathan P., 2010. "Measuring What Employers Really Do about Entry Wages over the Business Cycle," IZA Discussion Papers 4757, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp4757
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Hiring Wages are Volatile
      by Agent Continuum in Agent Continuum on 2010-03-08 21:37:59
    2. Some economics of payroll taxes
      by Pedro S. Martins in The Portuguese Economy on 2011-05-16 19:54:00

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    3. Galuscak, Kamil & Keeney, Mary & Nicolitsas, Daphne & Smets, Frank & Strzelecki, Pawel & Vodopivec, Matija, 2012. "The determination of wages of newly hired employees: Survey evidence on internal versus external factors," Labour Economics, Elsevier, vol. 19(5), pages 802-812.
    4. Marotzke Petra & Anderton Robert & Bairrao Ana & Berson Clémence & Tóth Peter, 2020. "Asymmetric wage adjustment and employment in European firms," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(2), pages 1-25, June.
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    6. Shin Donggyun, 2012. "Cyclicality of Real Wages in Korea," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-19, January.
    7. Pascal Michaillat, 2012. "Do Matching Frictions Explain Unemployment? Not in Bad Times," American Economic Review, American Economic Association, vol. 102(4), pages 1721-1750, June.
    8. Michaillat, Pascal, 2011. "Fiscal Multipliers Over the Business Cycle," CEPR Discussion Papers 8610, C.E.P.R. Discussion Papers.
    9. Mary C. Daly & Bart Hobijn & Theodore S. Wiles, 2011. "Aggregate real wages: macro fluctuations and micro drivers," Working Paper Series 2011-23, Federal Reserve Bank of San Francisco.
    10. Emmanuel Saez & Pascal Michaillat, 2013. "A Theory of Aggregate Supply and Aggregate Demand as Functions of Market Tightness with Prices as Parameters," 2013 Meeting Papers 1216, Society for Economic Dynamics.
    11. Pawel Krolikowski, 2017. "Job Ladders and Earnings of Displaced Workers," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(2), pages 1-31, April.
    12. Centeno, Mario & Novo, Alvaro A., 2014. "Paying for Others' Protection: Causal Evidence on Wages in a Two-Tier System," IZA Discussion Papers 8702, Institute of Labor Economics (IZA).
    13. Ho, Chi-san & Damien, Paul & Walker, Stephen, 2017. "Bayesian mode regression using mixtures of triangular densities," Journal of Econometrics, Elsevier, vol. 197(2), pages 273-283.
    14. Johannes F. Schmieder & Till von Wachter, 2010. "Does Wage Persistence Matter for Employment Fluctuations? Evidence from Displaced Workers," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 1-21, July.
    15. Stüber, Heiko, 2012. "Are real entry wages rigid over the business cycle? : Empirical evidence for Germany from 1977 to 2009," IAB-Discussion Paper 201206, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    16. Álvaro A. Novo & Mário Centeno, 2012. "Segmentation," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    17. Bachmann, Ronald & Bauer, Thomas K. & David, Peggy, 2010. "Labour Market Entry Conditions, Wages and Job Mobility," Ruhr Economic Papers 188, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    18. Ronald Bachmann & Thomas K. Bauer & Peggy David, 2010. "Labour Market Entry Conditions, Wages and Job Mobility," Ruhr Economic Papers 0188, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
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    More about this item

    Keywords

    real wage cyclicality; matched employer-employee data; entry wages;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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