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Cyclical Quality Adjustment in the Labor Market

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  • Paul J. Devereux

Abstract

Various reasons have been put forward to explain the stylized fact that the wages of job starters are more procyclical than the wages of workers who don't change jobs. I explore the theoretical and empirical basis for one such reason: firms adjust the quality of workers assigned to jobs over the business cycle. I show that there is evidence that quality adjustment is an important feature of cyclical adjustment in labor markets. New hires of any particular ability level get lower quality jobs in recessions than in booms. The results indicate that about half of the wage procyclicality of new hires can be ascribed to variation in the matches between firms and workers over the business cycle. These systematic changes in assignment imply that government policy aimed at high‐skill sectors can have positive effects on low‐skill individuals by increasing the probability that they upgrade occupation and industry.

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  • Paul J. Devereux, 2004. "Cyclical Quality Adjustment in the Labor Market," Southern Economic Journal, John Wiley & Sons, vol. 70(3), pages 600-615, January.
    • Handle: RePEc:wly:soecon:v:70:y:2004:i:3:p:600-615
    DOI: 10.1002/j.2325-8012.2004.tb00591.x
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    2. Pia M. Orrenius & Madeline Zavodny, 2011. "Immigrants’ employment outcomes over the business cycle," Staff Papers, Federal Reserve Bank of Dallas, issue Sep.
    3. Schlicht, Ekkehart, 2008. "Lohnspreizung und Effizienz," Discussion Papers in Economics 2117, University of Munich, Department of Economics.
    4. Ludsteck, Johannes, 2008. "Wage cyclicality and the wage curve under the microscope," IAB-Discussion Paper 200811, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    5. Pedro S. Martins & Gary Solon & Jonathan Thomas, 2010. "Measuring What Employers Really Do about Entry Wages over the Business Cycle," NBER Working Papers 15767, National Bureau of Economic Research, Inc.
    6. Ludsteck, Johannes & Haupt, Harald, 2007. "An Empirical Test of the Reder Hypothesis," Discussion Papers in Economics 1397, University of Munich, Department of Economics.

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