Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/272651 
Year of Publication: 
2023
Series/Report no.: 
IZA Discussion Papers No. 16024
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
Typical measures of wages, such as average hourly earnings, fail to capture cyclicality in the effective cost of labor in the presence of (i) cyclical fluctuations in the quality of worker-firm matches, or (ii) wages being smoothed within employment matches. To address both concerns, we estimate cyclicality in labor's user cost exploiting the long-run wage in a match to control for match quality. Using NLSY data for 1980 to 2019, we identify three channels by which hiring in a recession affects user cost: It lowers the new-hire wage; it lowers wages going forward in the match; but it also results in higher subsequent separations. All totaled, we find that labor's user cost is highly procyclical, increasing by more than 4% for a 1 pp decline in the unemployment rate. For large recessions, like the Great Recession, that implies a decline in the price of labor of about 15%.
Subjects: 
wages
cyclicality
wage rigidity
JEL: 
E24
E32
J30
J41
J63
J64
Document Type: 
Working Paper

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