The Cyclicality of Real Wages within Employer-Employee Matches

Using data from the Panel Study of Income Dynamics, the author examines the cyclicality of wages within employer-employee matches for the years 1970–91. Recent research on wage cyclicality has suggested that wages are very procyclical (tending to rise and fall with economic upturns and downturns), even for workers who remain with the same employer. The author finds, however, that the evidence for wage procyclicality within the matches he examines is rather weak except for the small group of workers who were paid by piece rate or commissions. Despite having acyclical wage rates, men who were paid hourly had earnings movements that were very procyclical. Salaries exhibited little cyclicality, but salaried workers who had income sources from bonuses, commissions, or overtime had procyclical earnings. The results suggest that the increasing prevalence of incentive-based pay will increase the procyclicality of wages within matches.