On the Cyclicality of Real Wages and Wage Differentials

Christopher Otrok and Panayiotis Pourpourides

No 2011-4, Working Papers from Central Bank of Cyprus

Abstract: In this paper we investigate the cyclicality of real wages. The approach we take is to search for the largest possible common cyclical component in a statistical sense. This contrasts with the existing literature which uses observable variables to proxy for a common cycle. We do so by using a Bayesian dynamic latent factor model and longitudinal microdata. We find that the comovement of real wages can be related to a common factor that exhibits a significant but far from perfect correlation with the national unemployment rate. Our findings indicate that (i) the common factor explains, on average, no more than 9% of wage variation, (ii) the common factor accounts for 20% or less of the wage variability for 88% of the workers in the sample and (iii) 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 the business cycle. We show that these results are inconsistent with models of Walrasian labor markets typically used in DSGE models. We also confirm findings of previous studies in which skilled and unskilled wages exhibit roughly the same degree of cyclical variation.

Keywords: Wages; wage differentials; business cycles; Bayesian analysis. (search for similar items in EconPapers)
JEL-codes: C11 C13 C22 C23 C81 C82 J31 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2011-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
https://www.centralbank.cy/images/media/pdf/NPWPE_No4_092011_.pdf (application/pdf)

Related works:
Journal Article: On the cyclicality of real wages and wage differentials (2019)
Working Paper: On The Cyclicality of Real Wages and Wage Differentials (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cyb:wpaper:2011-4

Access Statistics for this paper

More papers in Working Papers from Central Bank of Cyprus Contact information at EDIRC.
Bibliographic data for series maintained by Anna Markidou ().