The cyclical behavior of real wages has traditionally been regarded as an important issue for understanding business cycles. A long history of empirical research on this topic, however, has produced a bewildering array of conflicting evidence. Recently this has led many macroeconomists to formulate theoretical models that imply no cyclical pattern in real wages. Numerous fragments of evidence, however, suggest that the seemingly non-cyclical behavior of aggregate real wages on average masks regular underlying patterns which vary according to sector and whether the time period is dominated by real or nominal shocks. The purpose of this project is to: (a) systematically catalog the real wage implications of alternative theories, with special attention to multi-sector models; (b) conduct new empirical analyses including detailed investigations of how real wage patterns vary with time period, union status, and several relevant industry groupings; (c) treat composition biases inherent in aggregate time series data through careful use of longitudinal microdata from the Michigan Panel Study of Income Dynamics. This research is important because it will provide a better understanding of the behavior of real wages over the business cycle.
