Real Wages Over The Business Cycle

This paper is an examination of cyclical real wage behavior in the United States since World War II. Like most previous aggregate studies. ours finds little cyclicalitv in aggregate industry real wage data. On the other hand, our analysis of longitudinal microdata from the Panel Study of Income Dynamics reveals substantial procyclicality. We find that this procyclicality is obscured in industry average wage statistics, and to a lesser extent in economywide averages, because those statistics are constructed in a way that gives greater weight to low-wage workers during expansions. The almost complete absence of evidence for countercyclical real wages suggests that movements along labor demand curves have not played a dominant role in cyclical employment fluctuations over the last 40 years. Instead, the procyclicality of real wages indicates that cyclical employment fluctuations have been generated mainly by shifts in labor demand. The sources of these shifts and of the positive slope of the effective labor supply curve, however, remain open to alternative interpretations.