Industrial output variability and real wage fluctuations: Determinants andimplications

The cyclical behavior of the real wage differentiates between the empirical validity of major new Keynesian sticky-wage and sticky-price explanations of business cycles. Across industries of the United States, an increase in pricefle.uibility relative to wage flexibility correlates with a reduction in output fluctuations in the face of demand shocks. Further, industrial re al output variability does not vary significantly with nominal wage flexibi lity. In contrast, an increase in price flexibility moderates industrial re al output variability. Consistently, an increase in the real wage response to demand shocks correlates with an increase in industrial output variabili ty. (JEL E32, E31).