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

38 Pages Posted: 26 May 2009

See all articles by Anabela Jesus Moreira Carneiro

Anabela Jesus Moreira Carneiro

Universidade do Porto - Faculdade de Economia (FEP)

Paulo Guimaraes

University of South Carolina - Darla Moore School of Business; IZA Institute of Labor Economics

Pedro Portugal

Bank of Portugal - Research Department; New University of Lisbon; IZA Institute of Labor Economics

Abstract

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. Accounting for both worker and firm heterogeneity, the data support the hypothesis 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 2.8% and by just 1.4% for workers in continuing jobs. Since we estimate the fixed effects, we were able to show that unobserved heterogeneity plays a non-trivial role in the cyclicality of wages. In particular, worker fixed effects of new hires and separating workers behave countercyclically, whereas firm fixed effects exhibit a procyclical pattern. Finally, the results reveal, for all workers, a wage-productivity elasticity of 1.2, slightly above the one-for-one response predicted by the Mortensen-Pissarides model.

Keywords: wage cyclicality, hires, firm-specific effects, compositional effects, labor productivity

JEL Classification: J31, E24, E32

Suggested Citation

Carneiro, Anabela Jesus Moreira and Guimaraes, Paulo and Portugal, Pedro, Real Wages and the Business Cycle: Accounting for Worker and Firm Heterogeneity. IZA Discussion Paper No. 4174, Available at SSRN: https://ssrn.com/abstract=1409218

Anabela Jesus Moreira Carneiro (Contact Author)

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

Paulo Guimaraes

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Pedro Portugal

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
Portugal
+351 21 313 0000 (Phone)
+351 21 814 3841 (Fax)

New University of Lisbon

Lisbon, 1099-085
Portugal

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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