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Measuring the cyclicality of real wages: how important is aggregation across industries?

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  • Eric T. Swanson

Abstract

There is a growing consensus among economists that real wages in the postwar U.S. have been moderately to strongly procyclical, particularly in panel data on workers. From the point of view of hiring decisions of firms, however, this conclusion may be premature or even erroneous. Whether a firm's labor demand curve is stable or shifting at business cycle frequencies should be tested with a wage that is deflated by the firm's own price of output, with appropriate controls for the prices of intermediate inputs, and with respect to the cyclical state of the firm's own industry, as opposed to the state of the aggregate economy. I find that failing to control for these factors has led to a substantial procyclical bias in previous estimates of wage cyclicality. In two-digit and four-digit level (SIC) industry data on wages, with controls for changes in worker composition, I find that a substantial majority of sectors have paid real product wages that vary inversely (i.e., countercyclically) with the state of their industry.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-52.

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Date of creation: 1999
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Handle: RePEc:fip:fedgfe:1999-52

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Related research

Keywords: Wages ; Business cycles;

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References

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  1. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Working Paper Series, Macroeconomic Issues 90, Federal Reserve Bank of Chicago.
  2. Ellen R. McGrattan, 1994. "A progress report on business cycle models," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-16.
  3. Robert J. Barro & Robert G. King, 1982. "Time-Separable Preference and Intertemporal-Substitution Models of Business Cycles," NBER Working Papers 0888, National Bureau of Economic Research, Inc.
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  7. Eric Swanson, 1999. "Models of sectoral reallocation," Finance and Economics Discussion Series 1999-03, Board of Governors of the Federal Reserve System (U.S.).
  8. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-55, December.
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  15. Robert B. Barsky & Gary Solon, 1989. "Real Wages Over The Business Cycle," NBER Working Papers 2888, National Bureau of Economic Research, Inc.
  16. Marcello M. Estevao & Beth Anne Wilson, 1998. "Nominal wage rigidity and real wage cyclicality," Finance and Economics Discussion Series 1998-21, Board of Governors of the Federal Reserve System (U.S.).
  17. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  18. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
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  20. George J. Stigler & James K. Kindahl, 1970. "The Behavior of Industiral Prices," NBER Books, National Bureau of Economic Research, Inc, number stig70-1, October.
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