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Measuring What Employers Really Do about Entry Wages over the Business Cycle

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Author Info

  • Martins, Pedro S.

    () (Queen Mary, University of London)

  • Solon, Gary

    () (Michigan State University)

  • Thomas, Jonathan P.

    () (University of Edinburgh)

Abstract

In models recently published by several influential macroeconomic theorists, rigidity in the real wages that firms pay newly hired workers plays a crucial role in generating realistically large cyclical fluctuations in unemployment. There is remarkably little evidence, however, on whether employers' hiring wages really are invariant to business cycle conditions. We review the small empirical literature and show that the methods used thus far are poorly suited for identifying employers’ wage practices. We propose a simpler and more relevant approach – use matched employer/employee longitudinal data to identify entry jobs and then directly track the cyclical variation in the real wages paid to workers newly hired into those jobs. We illustrate the methodology by applying it to data from an annual census of employers in Portugal over the period 1982-2007. We find that real entry wages in Portugal over this period tend to be about 1.8 percent higher when the unemployment rate is one percentage point lower. Like most recent evidence on other aspects of wage cyclicality, our results suggest that the cyclical elasticity of wages is similar to that of employment.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4757.

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Length: 39 pages
Date of creation: Feb 2010
Date of revision:
Publication status: published in: American Economic Journal: Macroeconomics, 2012, 4 (4), 36-55
Handle: RePEc:iza:izadps:dp4757

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Keywords: real wage cyclicality; matched employer-employee data; entry wages;

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References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Hiring Wages are Volatile
    by Agent Continuum in Agent Continuum on 2010-03-08 15:37:59
  2. Some economics of payroll taxes
    by Pedro S. Martins in The Portuguese Economy on 2011-05-16 14:54:00
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Cited by:
  1. Mary C. Daly & Bart Hobijn & Theodore S. Wiles, 2011. "Aggregate Real Wages: Macro Fluctuations and Micro Drivers," Tinbergen Institute Discussion Papers 11-158/3, Tinbergen Institute.
  2. Bachmann, Ronald & Bauer, Thomas K. & David, Peggy, 2010. "Labor Market Entry Conditions, Wages and Job Mobility," IZA Discussion Papers 4965, Institute for the Study of Labor (IZA).
  3. Mary C. Daly & Bart Hobijn & Theodore S. Wiles, 2011. "Aggregate real wages: macro fluctuations and micro drivers," Working Paper Series 2011-23, Federal Reserve Bank of San Francisco.
  4. Mário Centeno & Álvaro A. Novo, 2012. "Segmentation," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  5. Michaillat, Pascal, 2011. "Fiscal Multipliers Over the Business Cycle," CEPR Discussion Papers 8610, C.E.P.R. Discussion Papers.
  6. 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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