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The cyclical price of labor when wages are smoothed

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  • Marianna Kudlyak

Abstract

I conduct an empirical investigation of the cyclicality of the price of labor. Firms employ workers up to the point where workers' marginal revenue product equals the price of labor. If the labor market is a spot market, then the price of labor is the wage. But often workers are contracted for more than one period. The price of labor captures both the wage at the time of hiring and the impact of labor market conditions at the time of hiring on future wages. The price of labor and not wage is allocational for employment. Because it is not directly observed in the data, I construct the price of labor based on the behavior of individual wages and turnover. I find that a one percentage point increase in unemployment generates more than a 4.5% decrease in the price of labor. This cyclicality is three times higher than the cyclicality of individual wages and also noticeably higher than the cyclicality of the wages of newly hired workers. I conclude that the price of labor is very procyclical.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 10-13.

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Date of creation: 2010
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Handle: RePEc:fip:fedrwp:10-13

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Related research

Keywords: Business cycles ; Labor supply ; Unemployment ; Wages;

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Cited by:
  1. Pedro S. Martins & Gary Solon & Jonathan P. Thomas, 2012. "Measuring What Employers Do about Entry Wages over the Business Cycle: A New Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 36-55, October.
  2. 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.
  3. BELLOU Andriana & KAYMAK Baris, 2011. "Wages, Implicit Contracts, and the Business Cycle: Evidence from a European Panel," CEPS/INSTEAD Working Paper Series 2011-13, CEPS/INSTEAD.

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