On the cyclicality of real wages and wage differentials

Abstract

Citation for final published version:Pourpourides, Panayiotis M. and Otrok, Christopher 2017. On the cyclicality of real wages and wage differentials. AbstractPrevious 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 …nd that the comovement of real wages is related to a common factor that exhibits a signi…cant but imperfect correlation with the national unemployment rate. Among others, our …ndings indicate that the common factor explains, on average, no more than 9% of wage variation, the common factor 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. JEL Classi…cation Codes: C11, C13, C22, C23, C81, C82, J31We thank Julie Yates (Bureau of Labor Statistics) and Steve McClaskie (National Longitudinal Surveys user services) for information and help with the data.

Macroeconomic performance of countries across monetary policy regimes from 2000 to 2017

“…We use macroeconomic variables of major interest for economists after the Great Recession: policy rates; real wages; unemployment rates; inflation and exchange rates. As concerns wages, its pro or counter cyclicality is heavily discussed since 2007 (Otrok & Pourpourides, 2019;Verdugo, 2016). Likewise, the linkage between output and unemployment (i.e., Okun's Law) has been widely debated since the Great Recession (Grant, 2018).…”

Global House Price Fluctuations: Synchronization and Determinants

“…This is true in models with Walrasian labor markets. However, Otrok and Pourpourides (2011) find that micro-level wage data is inconsistent with the prediction of models with Walrasian labor markets. We do not impose this restriction since it is not robust.…”

Macroeconomic Factors and Micro-Level Bank Risk

“…deviations of the policy rate from the rate implied by the Taylor rule (Altunbas et al 2009). 5 Other papers combining factor models and micro-level data (with a different focus) are Den Reijer (2007) and Otrok and Pourpourides (2008).…”