Measuring What Employers Do about Entry Wages over the Business Cycle: A New Approach

Rigidity in real hiring wages plays a crucial role in some recent macroeconomic models. But are hiring wages really so noncyclical? We propose using employer/employee longitudinal data to track the cyclical variation in the wages paid to workers newly hired into specific entry jobs. Illustrating the methodology with 19822008 data from the Portuguese census of employers, we find real entry wages were about 1.8 percent higher when the unemployment rate was one percentage point lower. Like most recent evidence on other aspects of wage cyclicality, our results suggest that the cyclical elasticity of wages is similar to that of employment. At least since Keynes (1936), macroeconomists have theorized that wages are inflexible and that limited cyclical variability of wages may account for the cyclical volatility of employment and unemployment. The idea continues to figure prominently in the current literature. For example, the very first sentence of the recent Journal of Political Economy paper by Gertler and Trigari (2009, p. 38) says, “A long-standing challenge in macroeconomics is accounting for the relatively smooth behavior of real wages over the business cycle along with the relatively volatile behavior of employment.” Much of the current interest in the cyclical behavior of wages, especially hiring wages, has grown out of a debate about the ability of the canonical Mortensen-Pissarides Martins, School of Business and Management, Queen Mary, University of London, London E1 4NS, U.K., and Ministry of the Economy and Employment, Portugal (e-mail: [email protected]); Solon, Department of Economics, Michigan State University, East Lansing, MI 48824, U.S.A. (e-mail: [email protected]); Thomas, School of Economics, University of Edinburgh, Edinburgh EH8 9JT, U.K. (email: [email protected]). The authors are grateful for the advice of the referees, Michael Elsby, Pedro Portugal, and seminar participants at the University of Edinburgh, Michigan State University, the University of Kent, the University of Western Ontario, the National Bureau of Economic Research Summer Institute, the Royal Economic Society, the CREI/Kiel Institute conference on “Macroeconomic Fluctuations and the Labor Market,” the International Tor Vergata Conference on Money, Banking, and Finance, and the SIRE Young Researchers Forum at Heriot-Watt University. Martins and Thomas are grateful for the support of the ESRC (RES-062-23-0546).