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

Julien Champagne and André Kurmann

Cahiers de recherche from CIRPEE

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.

Keywords: Wage volatility; business cycles; great moderation; current population survey; dynamic stochastic general equilibrium models (search for similar items in EconPapers)
JEL-codes: E24 E32 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-lab and nep-mac
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Citations: View citations in EconPapers (4)

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Working Paper: The Great Increase in Relative Volatility of Real Wages in the United States (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1010

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