LABOR QUALITY AND AGGREGATE REAL-WAGE DYNAMICS

The real wage plays an important role in many aggregate econometric st udies of the labour market. However, average wages, like any other ave rage quantity, can change for two reasons - either through an underlyi ng movement in the earnings potential of a unit of labour of given qua lity or, alternatively, through compositional changes which alter the relative proportions of different types of labour within the employed labour force. Using data from the General Household Survey to estimate earnings functions, the paper seeks to examine the contribution of th ese two factors for Britain from 1979 to 1989. It is shown that in per iods of rising unemployment compositional changes can have a bigger ef fect on real-earnings growth than any underlying change in reward to l abour of given quality. This raises the question of what economists ac tually are measuring when considering the behaviour of the aggregate r eal wage.