How Wages Change Over the Business Cycle

Modern economies experience recurrent fluctuations in business activity. As output and employment fall in recessions and busts and rise in recoveries and booms, other variables of economic significance also go through lows and highs. One such variable is real wages. Generally speaking, real wages are he cyclical behavior of real wages — wages adjusted for inflation — has changed over time. Before World War II, real wages in the U.S. were countercyclical: They rose during recessions and fell during expansions. Since the war, however, wages have become procyclical, falling during recessions and rising during expansions. One standard explanation is that economic shocks shifted from the demand side of the economy prewar to the supply side postwar. In this article, Kevin Huang offers evidence of an alternative explanation: the increased role that intermediate goods play in the production process in the postwar era.