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

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  • Pedro S. Martins
  • Gary Solon
  • Jonathan Thomas

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15767.

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Date of creation: Feb 2010
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Publication status: published as Martins, Pedro S., Gary Solon, and Jonathan P. Thomas. 2012. "Measuring What Employers Do about Entry Wages over the Business Cycle: A New Approach." American Economic Journal: Macroeconomics, 4(4): 36-55.
Handle: RePEc:nbr:nberwo:15767

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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. Kamil Galuscak & Mary Keeney & Daphne Nicolitsas & Frank Smets & Pawel Strzelecki & Matija Vodopivec, 2009. "The Determination of Wages of Newly Hired Employees: Survey Evidence on Internal versus External Factors," Working Papers 2009/5, Czech National Bank, Research Department.
  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. 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].
  4. Gordon C.R. Kemp & J.M.C. Santos Silva, 2010. "Regression towards the mode," Economics Discussion Papers 686, University of Essex, Department of Economics.
  5. Philip Oreopoulos & Till von Wachter & Andrew Heisz, 2012. "The Short- and Long-Term Career Effects of Graduating in a Recession," American Economic Journal: Applied Economics, American Economic Association, vol. 4(1), pages 1-29, January.
  6. Ronald Bachmann & Thomas K. Bauer & Peggy David, 2010. "Labour Market Entry Conditions, Wages and Job Mobility," Ruhr Economic Papers 0188, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  7. Johannes F. Schmieder & Till von Wachter, 2010. "Does Wage Persistence Matter for Employment Fluctuations? Evidence from Displaced Workers," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 1-21, July.
  8. Pascal Michaillat, 2012. "Fiscal Multipliers over the Business Cycle," CEP Discussion Papers dp1115, Centre for Economic Performance, LSE.
  9. Pascal Michaillat, 2010. "Do Matching Frictions Explain Unemployment? Not in Bad Times," CEP Discussion Papers dp1024, Centre for Economic Performance, LSE.
  10. 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.
  11. Mário Centeno & Álvaro A. Novo, 2012. "Segmentation," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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