On the cyclicality of real wages and wage differentials

Christopher Otrok and Panayiotis Pourpourides

The B.E. Journal of Macroeconomics, 2019, vol. 19, issue 1, 18

Abstract: Previous empirical literature suggests that estimated wage cyclicality depends on the structure of the relationship between real wages and an observed indicator of the business cycle that econometric models impose prior to estimation. This paper, alleviates the problem of imposing such structure by searching directly for the largest common cycles in longitudinal microdata using a Bayesian dynamic latent factor model. We find that the comovement of real wages is related to a common factor that exhibits a significant but imperfect correlation with the national unemployment rate. Among others, our findings indicate that the common factor explains, on average, no more than 9% of wage variation, it accounts for 20% or less of the wage variability for 88% of the workers in the sample and roughly half of the wages move procyclically while half move countercyclically. These facts are inconsistent with claims of a strong systematic relationship between real wages and business cycles.

Keywords: Bayesian analysis; business cycles; wage differentials; wages (search for similar items in EconPapers)
JEL-codes: C11 C13 C22 C23 C81 C82 J31 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: On the Cyclicality of Real Wages and Wage Differentials (2011)
Working Paper: On The Cyclicality of Real Wages and Wage Differentials (2009)
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DOI: 10.1515/bejm-2017-0047

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