Decades of evidence on the cyclicality of real wages

I keep on hearing that “running the economy hot” is going to be very good for workers.  So shall we look at the decades of evidence?

On average, the prevailing view has been that real wages are roughly acyclical across the business cycle, though with variation across and across researchers.

Here is one take from the AER:

The cyclical behavior of real wages has evolved from mildly countercyclical during the interwar period to modestly procyclical in the postwar era.

In recent times a mild acyclicality for real wages has become a more popular view, but in the 1980s it was more likely that the RBC theorists would try to show cyclicality and the aggregate demand theorists would pooh-pooh such demonstrations and insist on much weaker and theoretically ambiguous correlations.  Here is an older view, incomplete in my opinion but far from absurd:

It is shown that real wages are procyclical in response to technology and oil price shocks but are countercyclical in response to aggregate demand shocks.The evidence is consistent with models where nominal wages are stickier than nominal prices

Here is a biased but interesting post Keynesian survey of the questions, with the author more or less implying we don’t know what we are talking about.  Here is one of the stronger results on pro-cyclical real wages, for the EU, but it requires you to believe there is no nominal downward wage stickiness during the Great Recession (ready to bite that bullet?).

Here is a 1995 JEL survey by very good economists (Katherine Abraham and John Haltiwanger).  Part of the very first sentence is:

…the debate over the cyclicality of real wages has a very long history and is filled with conflicting hypotheses and inconclusive evidence.

Here is another 1995 survey.  Notice that what is probably the best and best-known attempt to explain why the cyclicality of real wages might be changing over time is built on a general equilibrium business cycle model, which has become a horror of horrors on Twitter and also in blog space.

Overall, if you study the evidence on the cyclicality of real wages you will find it is a confusing and difficult problem, and furthermore that past results may not hold in the future or for that matter in the present.  Yet one rarely sees this literature, or its implications, discussed on Twitter, or for that matter on econ blogs.  Here is a simple rule: if you see a discussion of current labor markets and wages, ask if the author is coming to terms with these results or not.

And I don’t know of a single research result considering macro real wages, or other labor market factors, coming out of a pandemic with suddenly available highly effective vaccines.

#thegreatforgetting

It is once again time to take scientific agnosticism seriously.  Most of what you all are saying I just don’t think is founded upon very much, maybe in some cases there is n = 1 support but typically not more.

And dare I suggest that if we do not very well understand the course of wage/price over the business cycle, there is a lot more about cyclical labor markets we also don’t understand?

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