Abstract
We study differences in the adjustment of aggregate real wages in the manufacturing sector over the business cycle across OECD countries, combining results from different data and dynamic methods. Summary measures of cyclicality show genuine cross-country heterogeneity even after controlling for the impact of data and methods. We find that more open economies and countries with stronger unions tend to have less pro-cyclical (or more counter-cyclical) wages. We also find a positive correlation between the cyclicality of real wages and employment, suggesting that policy complementarities may influence the adjustment of both quantities and prices in the labour market.
Highlights
Empirical evidence about the direction and the extent of the response of aggregate real wages to business cycle fluctuations is inconclusive
Our findings suggest that data and methods matter for observed real wage cyclicality, confirming previous survey evidence
Little is known about true cross-country variation in the adjustment of real wages over the business cycle and its potential determinants
Summary
Empirical evidence about the direction and the extent of the response of aggregate real wages to business cycle fluctuations is inconclusive. We provide a first systematic cross-country evidence of real wage cyclicality using empirical approaches that properly take into account the dynamic nature of the aggregate time-series under consideration Most studies in this literature have measured co-movement between real wages and the cycle using a static approach.. In addition to properly taking into account the dynamics of the data series these methods allow us to evaluate different business cycle horizons as an additional dimension that may result in variation across countries. While the use of dynamic methods is likely to provide more accurate measures of real wage cyclicality than static measures, we find that whether co-movement is measured in the short or the long run is not an important determinant of differences in real wage cyclicality across countries. These indicators of the business cycle tend to be more volatile than nominal or real wages (with exception of the PPI deflated real wage measure)
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