# 11-158/3 (2011-11-08)

Author(s)
Mary C. Daly, Federal Reserve Bank of San Francisco; Bart Hobijn, Federal Reserve Bank of San Francisco, and VU University Amsterdam; Theodore S. Wiles, The Analysis Group
Keywords:
Business cycle, labor market dynamics, wages.
JEL codes:
E24, J3, J6

Using data from the Current Population Survey from 1980 through 2010 we examine what drives variation andcyclicality in the growth rate of real wages over time. We employ a novel decomposition technique that allowsus to divide the time series for median weekly earnings growth into the part associated with the wage growth ofpersons employed at the beginning and end of the period (the wage growth effect) and the part associated withchanges in the composition of earners (the composition effect). The relative importance of these two effectsvaries widely over the business cycle. When the labor market is tight job switchers get high wage increases,making them account for half of the variation in median weekly earnings growth over our sample. Their wagegrowth, as well as that of job-stayers, is procyclical. During labor market downturns, this procyclicality islargely offset by the change in the composition of the workforce, leading aggregate real wages to be almost noncyclical.Most of this composition effect works through the part-time employment margin. Remarkably, theunemployment margin neither accounts for much of the variation nor for much of the cyclicality of medianweekly earnings growth.