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The Great Increase in Relative Volatility of Real Wages in the United States

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  • Julien Champagne
  • André Kurmann

Abstract

This paper documents that over the past 25 years, aggregate hourly real wages in the United States have become substantially more volatile relative to output. We use micro-data from the Current Population Survey (CPS) to show that this increase in relative volatility is predominantly due to increases in the relative volatility of hourly wages across different groups of workers. Compositional changes, by contrast, account for at most 12% of the increase in relative wage volatility. Using a Dynamic Stochastic General Equilibrium (DSGE) model, we show that the observed increase in relative wage volatility is unlikely to come from changes outside of the labor market (e.g. smaller exogenous shocks or more aggressive monetary policy). By contrast, increased flexibility in wage setting is capable of accounting for a large fraction of the observed increase in relative wage volatility. At the same time, increased wage flexibility generates a substantial decrease in the magnitude of business cycle fluctuations, which suggests a promising new explanation for the Great Moderation.

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  • Julien Champagne & André Kurmann, 2010. "The Great Increase in Relative Volatility of Real Wages in the United States," Cahiers de recherche 1010, CIRPEE.
  • Handle: RePEc:lvl:lacicr:1010
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    Cited by:

    1. Jordi Galí & Thijs van Rens, 2008. "The vanishing procyclicality of labor productivity," Economics Working Papers 1230, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2010.
    2. Cristina Fuentes-Albero, "undated". "Financial Frictions, Financial Shocks, and Aggregate Volatility," Departmental Working Papers 201201, Rutgers University, Department of Economics.
    3. Jovanovic, Branimir & Petreski, Marjan, 2014. "Monetary policy, exchange rates and labor unions in SEE and the CIS during the financial crisis," Economic Systems, Elsevier, vol. 38(3), pages 309-332.
    4. Baumeister, Christiane & Liu, Philip & Mumtaz, Haroon, 2013. "Changes in the effects of monetary policy on disaggregate price dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 543-560.
    5. Branimir Jovanovic & Marjan Petreski, 2012. "Hemlock for policy response: Monetary policy, exchange rates and labour unions in SEE and CIS during the crisis," FIW Working Paper series 081, FIW.
    6. Peter Flaschel & Alfred Greiner & Camille Logeay & Christian Proano, 2012. "Employment cycles, low income work and the dynamic impact of wage regulations. A macro perspective," Journal of Evolutionary Economics, Springer, vol. 22(2), pages 235-250, April.

    More about this item

    Keywords

    Wage volatility; business cycles; great moderation; current population survey; dynamic stochastic general equilibrium models;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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