Real Wages and the Cycle : The View from the Frequency Domain

In the time domain, the observed cyclical behavior of the real wage hides a range of economic influences that give rise to cycles of differing lengths and strengths. This may serve to produce a distorted picture of wage cyclicality. Here, we develop frequency domain methods that allow us decompose wages into cyclical components and to assess the relative contribution of each component to overall variation. These are discussed in relation to wages alone (the univariate case) and to wages in relation to production or employment-based measures of the cycle (multivariate). In the multivariate dimension, we derive methods for testing (i)lead-lag relationships and (ii) time dependency of lengths of cycles. We establish that real wages are strongly pro-cyclical and that the business cycle is the dominant associated influence