Unequal Wage Cyclicality: Evidence, Theory, and Implications for Labor Market Volatility
Abstract
This study provides evidence of unequal wage cyclicality: real wages in high-wage jobs are strongly procyclical, whereas those in middle- and low-wage jobs are largely acyclical. To explain why lower-wage jobs exhibit weaker wage cyclicality, the paper develops a search-and-matching model featuring job ladder and vacancy chain effects from on-the-job search and replacement hiring. During expansions, firms face greater opportunities to replace poorly matched workers with better-matched candidates, raising the value of their outside option and thereby suppressing wage increases. These mechanisms also amplify cyclical fluctuations in labor market flows. The calibrated model explains three-fourths of observed unemployment volatility.