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Real Wages and the Business Cycle: Accounting for Worker and Firm Heterogeneity

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Author Info

  • Carneiro, Anabela

    ()
    (University of Porto)

  • Guimaraes, Paulo

    ()
    (University of Porto)

  • Portugal, Pedro

    ()
    (Banco de Portugal)

Abstract

Using a longitudinal matched employer-employee data set for Portugal over the 1986-2005 period, this study analyzes the heterogeneity in wages responses to aggregate labor market conditions for newly hired workers and existing workers. Accounting for both worker and firm heterogeneity, the data support the hypothesis that entry wages are much more procyclical than current wages. A one-point increase in the unemployment rate decreases wages of newly hired male workers by around 2.8% and by just 1.4% for workers in continuing jobs. Since we estimate the fixed effects, we were able to show that unobserved heterogeneity plays a non-trivial role in the cyclicality of wages. In particular, worker fixed effects of new hires and separating workers behave countercyclically, whereas firm fixed effects exhibit a procyclical pattern. Finally, the results reveal, for all workers, a wage-productivity elasticity of 1.2, slightly above the one-for-one response predicted by the Mortensen-Pissarides model.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4174.

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Length: 38 pages
Date of creation: May 2009
Date of revision:
Publication status: published as 'Real Wages and the Business Cycle: Accounting for Worker, Firm and Job-Title Heterogeneity' in American Economic Journal: Macroeconomics, 2012, 4(2)
Handle: RePEc:iza:izadps:dp4174

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Related research

Keywords: labor productivity; compositional effects; firm-specific effects; hires; wage cyclicality;

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References

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  1. Olivier Blanchard, 2007. "Adjustment within the euro. The difficult case of Portugal," Portuguese Economic Journal, Springer, vol. 6(1), pages 1-21, April.
  2. Christian Haefke & Marcus Sonntag & Thijs van Rens, 2007. "Wage rigidity and job creation," Economics Working Papers 1047, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2012.
  3. Christopher A. Pissarides, 2007. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," CEP Discussion Papers dp0839, Centre for Economic Performance, LSE.
  4. Keane, Michael & Moffitt, Robert & Runkle, David, 1988. "Real Wages over the Business Cycle: Estimating the Impact of Heterogeneity with Micro Data," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1232-66, December.
  5. Bowlus, Audra J, 1995. "Matching Workers and Jobs: Cyclical Fluctuations in Match Quality," Journal of Labor Economics, University of Chicago Press, vol. 13(2), pages 335-50, April.
  6. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-89, August.
  7. Beaudry, Paul & DiNardo, John, 1991. "The Effect of Implicit Contracts on the Movement of Wages over the Business Cycle: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 665-88, August.
  8. Guimaraes, Paulo & Portugal, Pedro, 2009. "A Simple Feasible Alternative Procedure to Estimate Models with High-Dimensional Fixed Effects," IZA Discussion Papers 3935, Institute for the Study of Labor (IZA).
  9. Paul J. Devereux & Robert A. Hart, 2006. "Real wage cyclicality of job stayers, within-company job movers, and between-company job movers," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 60(1), pages 105-119, October.
  10. Ana Rute Cardoso & Pedro Portugal, 2005. "Contractual Wages and the Wage Cushion under Different Bargaining Settings," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 875-902, October.
  11. Paul J. Devereux, 2001. "The Cyclicality of real wages within employer-employee matches," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 54(4), pages 835-850, July.
  12. Barlevy, Gadi, 2001. "Why Are the Wages of Job Changers So Procyclical?," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 837-78, October.
  13. Brandolini, Andrea, 1995. " In Search of a Stylised Fact: Do Real Wages Exhibit a Consistent Pattern of Cyclical Variability?," Journal of Economic Surveys, Wiley Blackwell, vol. 9(2), pages 103-63, June.
  14. Pedro S. Martins, 2007. "Heterogeneity In Real Wage Cyclicality," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(5), pages 684-698, November.
  15. Robert A. Hart, 2006. "Worker-Job Matches, Job Mobility and Real Wage Cyclicality," Economica, London School of Economics and Political Science, vol. 73(290), pages 287-298, 05.
  16. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers dp0110, Centre for Economic Performance, LSE.
  17. Robert E. Hall, 2003. "Modern Theory of Unemployment Fluctuations: Empirics and Policy Applications," American Economic Review, American Economic Association, vol. 93(2), pages 145-150, May.
  18. Gary Solon & Robert Barsky & Jonathan A. Parker, 1992. "Measuring the Cyclicality of Real Wages: How Important is Composition Bias," NBER Working Papers 4202, National Bureau of Economic Research, Inc.
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  20. Arthur M. Okun, 1973. "Upward Mobility in a High-Pressure Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 207-262.
  21. 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.
  22. Shin, Donggyun, 1994. "Cyclicality of real wages among young men," Economics Letters, Elsevier, vol. 46(2), pages 137-142, October.
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Citations

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Cited by:
  1. Kilponen, Juha & Vanhala, Juuso, 2009. "Productivity and job flows: heterogeneity of new hires and continuing jobs in the business cycle," Working Paper Series 1080, European Central Bank.
  2. 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.
  3. Pedro Martins & Luca David Opromolla, 2011. "Why Ex(Im)porters Pay More: Evidence from Matched Firm-Worker Panels," Working Papers w201123, Banco de Portugal, Economics and Research Department.
  4. Martins, Pedro S. & Opromolla, Luca David, 2009. "Exports, Imports and Wages: Evidence from Matched Firm-Worker-Product Panels," IZA Discussion Papers 4646, Institute for the Study of Labor (IZA).
  5. John T. Addison & Orgul D.Ozturk & Si Wang, 2013. "Job Promotion in Mid-Career: Gender, Recession and ‘Crowding’," GEMF Working Papers 2013-16, GEMF - Faculdade de Economia, Universidade de Coimbra.
  6. Maritza López-Novella & Salimata Sissoko, 2009. "Working Paper 12-09 - Salaires et négociation collective en Belgique : une analyse microéconomique en panel," Working Papers 0912, Federal Planning Bureau, Belgium.
  7. Anger, Silke, 2011. "The cyclicality of effective wages within employer–employee matches in a rigid labor market," Labour Economics, Elsevier, vol. 18(6), pages 786-797.
  8. Mion, Giordano & Opromolla, Luca David, 2013. "Managers’ mobility, trade performance, and wages," Working Paper Series 1596, European Central Bank.
  9. Mário Centeno & Álvaro A. Novo, 2012. "Segmentation," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  10. 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.
  11. 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].

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