Real Wages and the Business Cycle: Accounting for Worker and Firm Heterogeneity

Using a longitudinal matched employer-employee data set for Portugal over the 1986-2005 period, this study analyzes the heterogeneity in wages responses to aggregate labor market conditions for newly hired workers and existing workers. Controlling simultaneously for worker and firm specific effects, the results show that entry wages are much more procyclical than current wages. A one-point increase in the unemployment rate decreases wages of newly hired male workers by around 2.5% and by just 1.5% for workers in continuing jobs. For female workers these same effects are 2.3% and 1.1%, respectively. Thus, our empirical evidence does not seem to lend support to the hypothesis of wage stickiness as an explanation for the unemployment volatility puzzle. JEL classification : D21; E24; E32; J31