Arbeitspapier

The Quality-Adjusted Cyclical Price of Labor

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%.

Language
Englisch

Bibliographic citation
Series: IZA Discussion Papers ; No. 16024

Classification
Wirtschaft
Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Business Fluctuations; Cycles
Wages, Compensation, and Labor Costs: General
Labor Contracts
Labor Turnover; Vacancies; Layoffs
Unemployment: Models, Duration, Incidence, and Job Search
Subject
wages
cyclicality
wage rigidity

Event
Geistige Schöpfung
(who)
Bils, Mark
Kudlyak, Marianna
Lins, Paulo
Event
Veröffentlichung
(who)
Institute of Labor Economics (IZA)
(where)
Bonn
(when)
2023

Handle
Last update
10.03.2025, 11:44 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Bils, Mark
  • Kudlyak, Marianna
  • Lins, Paulo
  • Institute of Labor Economics (IZA)

Time of origin

  • 2023

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