Employment composition and the cyclical behaviour of the aggregate real wage

This article investigates the relation between the cyclical behaviour of employment composition and the weighted average (aggregate) real wage in the USA. Cyclicality of employment composition arises in the context of two competing explanations of business-cycle theory: the human capital investment and profitability models. Consistent with the implications of the profitability theory, the relative share of labour hours for older (age greater than or equal to 25) more highly-skilled and paid workers declines faster during recessions compared to younger (( age 16-19) and (20-24)) less skilled and lower-paid workers. This result, coupled with the downward flexibility of teenage real wages reinforces the procyclical (reduction) in the aggregate real wage during recessions. Interestingly, the decline in the relative share of workers age greater than or equal to 25 during recessions is not accompanied by a corresponding significant decline in their nominal or real wages. Thus, most of the adjustment during cyclical downturns appears to result in a reduction in their relative share of labour hours as opposed to wages. In addition, the empirical results suggest that the relative share of employment for workers age greater than or equal to 25 grows more slowly during expansions compared to its decline during contractions, lending further support to the profitability theory. The combined evidence highlights the importance of both employment composition and disaggregate real wages and their influence in determining the cyclical behaviour of the aggregate real wage.