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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. Robert A. Hart, 2006. "Worker-Job Matches, Job Mobility and Real Wage Cyclicality," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 73(290), pages 287-298, 05.
  2. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  3. Robert E. Hall, 2003. "Modern Theory of Unemployment Fluctuations: Empirics and Policy Applications," American Economic Review, American Economic Association, American Economic Association, vol. 93(2), pages 145-150, May.
  4. Solon, Gary & Barsky, Robert & Parker, Jonathan A, 1994. "Measuring the Cyclicality of Real Wages: How Important Is Composition Bias?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(1), pages 1-25, February.
  5. Haefke, Christian & Sonntag, Marcus & van Rens, Thijs, 2008. "Wage Rigidity and Job Creation," IZA Discussion Papers 3714, Institute for the Study of Labor (IZA).
  6. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(4), pages 666-89, August.
  7. 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, University of Chicago Press, vol. 96(6), pages 1232-66, December.
  8. Shin, Donggyun, 1994. "Cyclicality of real wages among young men," Economics Letters, Elsevier, Elsevier, vol. 46(2), pages 137-142, October.
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  12. A Brandolini, 1993. "In Search of a Stylised Fact: Do Real Wages Exhibit a Consistent Pattern of Cyclical Variability?," CEP Discussion Papers dp0112, Centre for Economic Performance, LSE.
  13. 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.
  14. Barlevy, Gadi, 2001. "Why Are the Wages of Job Changers So Procyclical?," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 19(4), pages 837-78, October.
  15. 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.
  16. Paulo Guimarães & Pedro Portugal, 2009. "A Simple Feasible Alternative Procedure to Estimate Models with High-Dimensional Fixed Effects," Working Papers, Banco de Portugal, Economics and Research Department w200909, Banco de Portugal, Economics and Research Department.
  17. Ana Rute Cardoso & Pedro Portugal, 2005. "Contractual Wages and the Wage Cushion under Different Bargaining Settings," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 23(4), pages 875-902, October.
  18. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 25-49, March.
  19. 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.
  20. Olivier Blanchard, 2007. "Adjustment within the euro. The difficult case of Portugal," Portuguese Economic Journal, Springer, Springer, vol. 6(1), pages 1-21, April.
  21. 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.
  22. Martins, Pedro S., 2007. "Heterogeneity in Real Wage Cyclicality," IZA Discussion Papers 2929, Institute for the Study of Labor (IZA).
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Citations

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Cited by:
  1. Anger, Silke, 2011. "The Cyclicality of Effective Wages within Employer-Employee Matches in a Rigid Labor Market," IZA Discussion Papers 5489, Institute for the Study of Labor (IZA).
  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. 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.
  4. Mário Centeno & Álvaro A. Novo, 2012. "Segmentation," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department, Banco de Portugal, Economics and Research Department.
  5. Kilponen , Juha & Vanhala, Juuso, 2009. "Productivity and job flows: Heterogeneity of new hires and continuing jobs in the business cycle," Research Discussion Papers, Bank of Finland 15/2009, Bank of Finland.
  6. 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, Society for Economic Dynamics 1216, Society for Economic Dynamics.
  7. 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].
  8. 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).
  9. Martins, Pedro S. & Opromolla, Luca David, 2011. "Why Ex(Im)porters Pay More: Evidence from Matched Firm-Worker Panels," IZA Discussion Papers 6013, Institute for the Study of Labor (IZA).
  10. González de San Román, Ainara & Rebollo-Sanz, Yolanda F., 2014. "An estimation of worker and firm effects with censored data," Economics Discussion Papers 2014-28, Kiel Institute for the World Economy.
  11. Mion, Giordano & Opromolla, Luca David, 2013. "Managers’ mobility, trade performance, and wages," Working Paper Series, European Central Bank 1596, European Central Bank.
  12. 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.

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