Measuring the Cyclicality of Real Wages: How Important Is the Firm's Point of View?

There is a growing consensus among economists that real wages in the postwar United States have been procyclical, greatly bolstering technology-driven theories of business cycles at the expense of more classical models. This paper makes the point that technological movements in firm's labor demand curves should be tested with a wage that is deflated by the firm's own price of output, with appropriate controls for intermediate inputs, and with respect to the cyclical state of the firm's own industry, as opposed to the state of the aggregate economy. Failure to control for these factors is found to lead to substantial overrejection of the classical model. In detailed industry data, with controls for changes in worker composition, I find that a vast majority of sectors have paid real product wages that vary inversely (that is, countercyclically) with the state of their industry. © 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.