Real Wages and the Business Cycle

The objectives of this review are threefold: (1) to characterize the empirical literature on the cyclical behavior of real wages; (2) to identify the sources of the differences in results across studies; and (3) to enumerate key factors that determine the cyclicality of real wages. Given a host of measurement and methodological issues, drawing firm conclusions is difficult, but several generalizations can be made. The estimated cyclicality of real wages depends crucially on the time period of analysis and the choice of whether to examine the production or the consumption wage. Composition effects play an important but complicated role as well.

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