Measuring the Cyclicality of Real Wages: How Important is Composition Bias?

Abstract

In the period since the 1960s, as in other periods, aggregate time series on real wages have displayed only modest cyclicality. Macroeconomists therefore have described weak cyclicality of real wages as a salient feature of the business cycle. Contrary to this conventional wisdom, our analysis of longitudinal microdata indicates that real wages have been substantially procyclical since the 1960s. We show that the true procyclicality of real wages is obscured in aggregate time series because of a composition bias: the aggregate statistics are constructed in a way that gives more weight to low-skill workers during expansions than during recessions.