| The Cyclicality of Real Wages and Wage Differentials: A Dynamic Factor Analysis | |||||||
Abstract | |||||||
| Using longitudinal microdata we implement a Bayesian dynamic latent factor model to analyze the cyclical properties of real wages. Contrary to previous econometric models our model does not impose an a priori structure on the relationship of wages with the business cycle. The factors and the parameters are sampled from posterior distributions using Markov Chain Monte Carlo methods. We show that the comovement of real wages can be related to a common factor that exhibits a negative correlation with the growth rate of real GDP. Our findings indicate that the common factor explains only 14% of wage variation which cannot justify claims of a strong systematic relationship between wages and the business cycle. The latter suggests that wage dynamics are more consistent with models of labor contracting. We also confirm findings of previous studies in which skilled and unskilled wages exhibit the same degree of cyclical variation. Finally, we find that neither gender nor race contribute substantially in wage variation.. Wages; Wage Differentials; Business Cycles; Bayesian Analysis | |||||||
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