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Employment composition and the cyclical behaviour of the aggregate real wage

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  • Magda Kandil
  • Jeffrey Woods

Abstract

This article investigates the relation between the cyclical behaviour of employment composition and the weighted average (aggregate) real wage in the USA. Cyclicality of employment composition arises in the context of two competing explanations of business-cycle theory: the human capital investment and profitability models. Consistent with the implications of the profitability theory, the relative share of labour hours for older (age ≥ 25) more highly-skilled and paid workers declines faster during recessions compared to younger ((age 16-19) and (20-24)) less skilled and lower-paid workers. This result, coupled with the downward flexibility of teenage real wages reinforces the procyclical (reduction) in the aggregate real wage during recessions. Interestingly, the decline in the relative share of workers age ≥ 25 during recessions is not accompanied by a corresponding significant decline in their nominal or real wages. Thus, most of the adjustment during cyclical downturns appears to result in a reduction in their relative share of labour hours as opposed to wages. In addition, the empirical results suggest that the relative share of employment for workers age ≥ 25 grows more slowly during expansions compared to its decline during contractions, lending further support to the profitability theory. The combined evidence highlights the importance of both employment composition and disaggregate real wages and their influence in determining the cyclical behaviour of the aggregate real wage.

Suggested Citation

  • Magda Kandil & Jeffrey Woods, 2002. "Employment composition and the cyclical behaviour of the aggregate real wage," Applied Economics, Taylor & Francis Journals, vol. 34(6), pages 689-708.
  • Handle: RePEc:taf:applec:v:34:y:2002:i:6:p:689-708
    DOI: 10.1080/00036840110053243
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    References listed on IDEAS

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    1. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, January.
    2. Michael P. Keane & Eswar S. Prasad, 1991. "The relation between skill levels and the cyclical variability of employment, hours and wages," Discussion Paper / Institute for Empirical Macroeconomics 41, Federal Reserve Bank of Minneapolis.
    3. Robert B. Barsky & Gary Solon, 1989. "Real Wages Over The Business Cycle," NBER Working Papers 2888, National Bureau of Economic Research, Inc.
    4. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
    5. Michael Keane & Eswar Prasad, 1993. "Skill Levels and the Cyclical Variability of Employment, Hours, and Wages," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 711-743, December.
    6. Finn E. Kydland & Edward C. Prescott, 1993. "Cyclical movements of the labor input and its implicit real wage," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 12-23.
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    Cited by:

    1. Dierk HERZER & Rainer KLUMP, 2009. "Poverty, Government Transfers, And The Business Cycle: Evidence For The United States," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(2).
    2. Karolina Goraus & Joanna Tyrowicz, 2013. "The Goodwill Effect? Female Access to the Labor Market Over Transition: A Multicountry Analysis," Working Papers 2013-19, Faculty of Economic Sciences, University of Warsaw.
    3. Kandil, Magda, 2007. "The wage-price spiral: International evidence and implications," Journal of Economics and Business, Elsevier, vol. 59(3), pages 212-240.
    4. Joanna Tyrowicz & Lucas van der Velde, 2017. "When the opportunity knocks: large structural shocks and gender wage gaps," GRAPE Working Papers 2, GRAPE Group for Research in Applied Economics.

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