Measuring the Cyclicality of Real Wages: How Important Is Composition Bias?

In the period since the 1960s, as in other periods, aggregate time series on real wages have displayed only modest cyclicality. Macroeconomists, therefore, have described weak cyclicality of real wages as a salient feature of the business cycle. Contrary to this conventional wisdom, the authors' analysis of longitudinal microdata indicates that real wages have been substantially procyclical since the 1960s. They show that the true procyclicality of real wages is obscured in aggregate time series because of a composition bias: the aggregate statistics are constructed in a way that gives more weight to low-skill workers during expansions than during recessions. Copyright 1994, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.