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Working Paper Summaries (WP/93/1 - WP/93/54)
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Summary of WP/93/44: “The Relation Between Skill Levels and the Cyclical Variability of Employment, Hours, and Wages”

Author(s):
International Monetary Fund
Published Date:
August 1993
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This paper uses microeconomic panel data to examine differences in the cyclical variability of employment, hours, and real wages for skilled and unskilled workers. The data come from the National Longitudinal Survey of Young Men, a panel containing 12 surveys conducted over a period of 16 years. The panel enables the authors to obtain estimates that control for aggregation bias on the basis of observed worker characteristics and also for unobserved individual fixed effects and selectivity effects. The paper surveys a number of models of labor market contracting to provide a conceptual framework for organizing and interpreting the empirical results.

Contrary to conventional wisdom, skilled and unskilled workers at the aggregate level appear to be subject to essentially the same degree of cyclical variation in wages. More precisely, after correction is made for observed and unobserved worker heterogeneity, relative offer wage differentials are shown to have no consistent procyclical or countercyclical tendencies. However, after controlling for other characteristics, older workers do appear to have more procyclical wages than younger workers.

Important differences emerge in the patterns of the variation of employment and hours for skilled versus unskilled workers, especially when a college degree is used as a proxy for skill level. Workers with a college degree have little cyclical variation in employment probabilities or weekly hours, while both are highly procyclical for workers without a degree. The greater procyclical variation in employment and hours for workers without a degree implies that the average quality of labor input per man-hour rises in a recession. Thus, a substantial countercyclical bias may exist in measures of the real wage that simply divide aggregate compensation by total man-hours.

The industry-level estimates reveal striking differences across industries in the cyclical variation of employment, hours, and wages. For instance, the relative wage premium for skills is strongly procyclical in durable and nondurable manufacturing and is countercyclical in retail trade and services. In some industries, such as nondurable manufacturing and retail trade, a large fraction of the variation in total hours worked appears to be accounted for by variation in average weekly hours rather than in the number of persons employed. In most other industries, as in the aggregate, employment variation seems more important than variation in weekly hours in accounting for cyclical fluctuations in total hours.

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