Real Wages over the Business Cycle: Evidence from a Structural Time Series Model.

This paper uses a Structural Time Series Model to investigate the behavior of real wages over the business cycle. Estimating a flexible trend using the Kalman Filter enables us to avoid the current controversy surrounding the unit testing issue. Using the unexpected changes in the price level and output we determine the periods dominated by demand and supply disturbances. Real wages in the United States, Canada, France, the United Kingdom move procyclically in the existence of supply shocks, but are countercyclical in the presence of demand disturbances. The results support the predictions of macro models involving nominal wage stickiness and the Real Business Cycle (RBC) premise that real wages are procyclical in the existence of supply disturbances. They also underscore the significance of recent RBC research which puts emphasis on demand disturbances. Copyright 1993 by Blackwell Publishing Ltd