Why Does the Cyclical Behavior of Real Wages Change Over Time?

By Kevin X.D. Huang, Zheng Liu, and Louis Phaneuf
December 2002 
RWP 02-09
Research Division 
Federal Reserve Bank of Kansas City 

Abstract

      This paper seeks to understand the evolution of the cyclical behavior of U.S. real wage rates from the interwar period to the post World War II period using a dynamic general equilibrium model that emphasizes demand-driven business cycle fluctuations. In the model, changes in the cyclical behavior of real wages arise endogenously from the interactions between nominal wage and price rigidities and an evolving input-output structure.

Keywords: Real Wage Cyclicality; Staggered Price and Wage Setting; Input-Output Structure

JEL Codes: E24, E32, E52

Kevin X.D. Huang is a senior economist at the Federal Reserve Bank of Kansas City. Zheng Liu is an assistant professor of economics at Emory University and a member of CIRP\'{E}E, CA. Louis Phaneuf is a professor of economics at the University of Quebec at Montreal and a member of CIRP\'{E}E, CA. The authors are grateful to Henning Bohn, Robert Chirinko, Todd Clark, Russell Cooper, Charles Evans, Peter Ireland, Robert King, Sharon Kozicki, Tommaso Monacelli, Plutarchos Sakellaris, Fabio Schiantarelli, Shouyong Shi, Frank Smets, Jonathan Willis, and seminar participants at Boston University, Emory University, Tufts University, the University of California at Santa Barbara, the European Central Bank, the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Kansas City, the 2001 Midwest Macro Meeting, the 2001 SED Annual Meeting, and the Econometric Society 2002 Winter Meeting for helpful comments. Phaneuf acknowledges financial support from SSHRC and FCAR and the research assistance of Mohamed Gammoudi. The views expressed in the paper are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

Huang e-mail:  kevin.huang@kc.frb.org
Lui e-mail:  zliu5@emory.edu