REAL WAGES OVER THE BUSINESS-CYCLE - A BAND SPECTRUM APPROACH

Presents new evidence on the cyclical relationship between real wages and aggregate employment. This paper uses a frequency domain procedure, Bank Spectrum Regression, to identify the purely business cycle correlation and distinguish it from correlations at very high and very low frequencies. The frequency domain decomposition provides a simple framework for reconciling the conflicting conclusions of previous studies and for focusing attention on the business cycle relationship. I show that the highly significant (positive or negative) correlations reported in previous studies are attributable to variations at frequencies far too high or far too low to be associated with the business cycle. I find a weak but statistically significant, negative relationship over business cycle frequencies for the post-war US data when wages are deflated by the Producer Price Index (PPI). However, when wages are deflated by the Consumer Price Index (CPI), the business cycle relationship is weak and not statistically significant over both subperiods. These results contrast sharply with those of previous studies that do not isolate business cycle components. -from Author