The Great Increase in Relative Volatility of Real Wages in Ithe United States

CIRPEE Working Paper 10-10

46 Pages Posted: 28 Feb 2010

See all articles by Julien Champagne

Julien Champagne

University of Quebec at Montreal (UQAM)

André Kurmann

Drexel University - LeBow College of Business

Date Written: February 25, 2010

Abstract

This paper documents that over the past 25 years, aggregate hourly real wages in the United States have become substantially more volatile relative to output. We use micro-data from the Current Population Survey (CPS) 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, by contrast, account for at most 12% of the increase in relative wage volatility. Using a Dynamic Stochastic General Equilibrium (DSGE) model, we show 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, increased flexibility in wage setting is capable of accounting for a large fraction of the observed increase in relative wage volatility. At the same time, increased wage flexibility generates a substantial decrease in the magnitude of business cycle fluctuations, which suggests a promising new explanation for the Great Moderation.

Keywords: Wage volatility, business cycles, great moderation, current population survey, dynamic stochastic general equilibrium models

JEL Classification: E24, E32

Suggested Citation

Champagne, Julien and Kurmann, André, The Great Increase in Relative Volatility of Real Wages in Ithe United States (February 25, 2010). CIRPEE Working Paper 10-10, Available at SSRN: https://ssrn.com/abstract=1559114 or http://dx.doi.org/10.2139/ssrn.1559114

Julien Champagne

University of Quebec at Montreal (UQAM) ( email )

PB 8888 Station DownTown
Succursale Centre Ville
Montreal, Quebec H3C3P8
Canada

André Kurmann (Contact Author)

Drexel University - LeBow College of Business ( email )

School of Economics
3220 Market Street
Philadelphia, PA 19104
United States

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