Events at CERGE-EI

Dr. Alisdair McKay

Boston University, USA

Authors: Alisdair McKay and Tamás Papp

Abstract: Wage volatility, measured as the cross-sectional variance of wage changes, is positively correlated with the unemployment rate with a correlation coefficient of 0.61. We decompose this correlation into three main factors. During a recession, wage volatility increases substantially among those experiencing spells of unemployment. The cyclical changes in the variance within this group explain about 55% of the cyclical variation in wage volatility. The variance within the group not experiencing unemployment explains 18%. Finally, an increase in the fraction of workers experiencing unemployment explains 25%. We quantify the posterior uncertainty surrounding this decomposition and show the results are robust.

Full Text: “Accounting for the Cyclical Volatility of Wages”