State-Level Evidence on the Cyclicality of Real Wages

Bryan Perry (), Kerk Phillips and David Spencer
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Bryan Perry: Department of Economics, MIT
Kerk Phillips: Department of Economics, Brigham Young University

No 2012-05, BYU Macroeconomics and Computational Laboratory Working Paper Series from Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory

Abstract: There is considerable evidence that real wages have become more procyclical over time in the U.S. A novel explanation for this phenomenon has been recently offered by Huang, Liu, and Phaneuf (2004), HLP. They develop a model to show that, as the input-output structure of an economy becomes more sophisticated, the response of real wages to an aggregate demand shock becomes more procyclical (less countercyclical) in an environment with both sticky wages and prices. We test the basic prediction of their model using state-level data in the U.S. We exploit the fact that the economies of individual states in the U.S. exhibit a range of input-output structures in the production process. This variation allows us to examine how the cyclical response of real wages to aggregate monetary policy varies with production structure in order to test the HLP hypothesis. We find strong support for the hypothesis. Our direct empirical test complements the evidence provided by HLP in their original paper.

Keywords: real wages; monetary policy; U.S. states (search for similar items in EconPapers)
JEL-codes: E10 E32 E52 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2012-08
New Economics Papers: this item is included in nep-mac
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Published in Annals of Economics and Finance, forthcoming

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