Journal article
The great increase in relative wage volatility in the United States
Journal of monetary economics, v 60(2), pp 166-183
01 Mar 2013
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
Over the past 25 years, real average hourly wages in the United States have become substantially more volatile relative to output. Microdata from the Current Population Survey (CPS) is used to show that this increase in relative volatility is predominantly due to increases in the relative volatility of hourly wages across different groups of workers. Compositional changes of the workforce, by contrast, account for only a small fraction of the increase in relative wage volatility. Simulations with a Dynamic Stochastic General Equilibrium (DSGE) model illustrate that the observed increase in relative wage volatility is unlikely to come from changes outside of the labor market (e.g. smaller exogenous shocks or more aggressive monetary policy). By contrast, greater flexibility in wage setting due to deunionization and a shift towards performance-pay contracts as experienced by the U.S. labor market is capable of accounting for a substantial fraction of the observed increase in relative wage volatility. Greater wage flexibility also decreases the magnitude of business cycle fluctuations, suggesting an interesting new explanation for the Great Moderation.
► Real average hourly wages in the U.S have become 2–3 times more volatile relative to output. ► This increase in relative wage volatility has occurred across most of the workforce. ► A DSGE model is developed to examine potential causes for the increased relative wage volatility. ► Changes in the importance of exogenous shocks cannot account for the phenomenon. ► Declining unionization and increased incidence of performance-pay contracts are likely causes.
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Details
- Title
- The great increase in relative wage volatility in the United States
- Creators
- Julien Champagne - Université du Québec à MontréalAndré Kurmann - Federal Reserve
- Publication Details
- Journal of monetary economics, v 60(2), pp 166-183
- Publisher
- Elsevier
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:000318325500003
- Scopus ID
- 2-s2.0-84875589219
- Other Identifier
- 991020550338604721
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- Collaboration types
- Domestic collaboration
- International collaboration
- Web of Science research areas
- Business, Finance
- Economics