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State-Level Evidence on the Cyclicality of Real Wages

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  • Bryan Perry

    ()
    (Department of Economics, MIT)

  • Kerk L. Phillips

    ()
    (Department of Economics, Brigham Young University)

  • David E. Spencer

    ()
    (Department of Economics, Brigham Young University)

Abstract

There is considerable evidence that real wages have become more procyclical over time in the U.S. A novel explanation for this phenomenon has been recently offered by Huang, Liu, and Phaneuf (2004), HLP. They develop a model to show that, as the input-output structure of an economy becomes more sophisticated, the response of real wages to an aggregate demand shock becomes more procyclical (less countercyclical) in an environment with both sticky wages and prices. We test the basic prediction of their model using state-level data in the U.S. We exploit the fact that the economies of individual states in the U.S. exhibit a range of input-output structures in the production process. This variation allows us to examine how the cyclical response of real wages to aggregate monetary policy varies with production structure in order to test the HLP hypothesis. We find strong support for the hypothesis. Our direct empirical test complements the evidence provided by HLP in their original paper.

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File URL: http://economics.byu.edu/Documents/Macro%20Lab/Working%20Paper%20Series/BYUMCL2012-05.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory in its series BYU Macroeconomics and Computational Laboratory Working Paper Series with number 2012-05.

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Length: 12 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:byu:byumcl:201205

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Keywords: real wages; monetary policy; U.S. states;

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References

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  1. Ben S. Bernanke & James Powell, 1986. "The Cyclical Behavior of Industrial Labor Markets: A Comparison of the Prewar and Postwar Eras," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 583-638 National Bureau of Economic Research, Inc.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  3. Christina D. Romer & David H. Romer, 2003. "A New Measure of Monetary Shocks: Derivation and Implications," NBER Working Papers 9866, National Bureau of Economic Research, Inc.
  4. Susanto Basu & Alan M. Taylor, 1999. "Business Cycles in International Historical Perspective," NBER Working Papers 7090, National Bureau of Economic Research, Inc.
  5. Gamber, Edward N & Joutz, Frederick L, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(5), pages 1387-93, December.
  6. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  7. Kevin X.D. Huang & Zheng Liu & Louis Phaneuf, 2004. "Why Does the Cyclical Behavior of Real Wages Change Over Time?," American Economic Review, American Economic Association, vol. 94(4), pages 836-856, September.
  8. John B. Taylor, 1998. "Staggered Price and Wage Setting in Macroeconomics," NBER Working Papers 6754, National Bureau of Economic Research, Inc.
  9. Susanto Basu, 1994. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," NBER Working Papers 4817, National Bureau of Economic Research, Inc.
  10. Charles A. Fleischman, 1999. "The causes of business cycles and the cyclicality of real wages," Finance and Economics Discussion Series 1999-53, Board of Governors of the Federal Reserve System (U.S.).
  11. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  12. Spencer, David E, 1998. "The Relative Stickiness of Wages and Prices," Economic Inquiry, Western Economic Association International, vol. 36(1), pages 120-37, January.
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