MEASURING THE CYCLICALITY OF REAL WAGES - HOW IMPORTANT IS COMPOSITION BIAS

In the period since the 1960s, as in other periods, aggregate time ser ies on real wages have displayed only modest cyclicality. Macroeconomi sts therefore have described weak cyclicality of real wages as a salie nt feature of the business cycle. Contrary to this conventional wisdom , our analysis of longitudinal microdata indicates that real wages hav e been substantially procyclical since the 1960s. We show that the tru e procyclicality of real wages is obscured in aggregate time series be cause of a composition bias: the aggregate statistics are constructed in a way that gives more weight to low-skill workers during expansions than during recessions.