Cyclical Behaviour of Real Wages in the Euro Area and OECD Countries

Despite the long tradition of empirical research on the cyclical behaviour of real wages there is no consensus view about the direction or the degree of cyclicality of real wages. We contribute to the existing empirical literature by providing consistent evidence of real wage cyclicality using a common methodology for the euro area and a large number of OECD countries, including a number of euro area countries. The results are based on a large dataset of quarterly data on real wages and output. We first analyse the cyclical co-movement of real wages and output using standard correlation analysis based on filtered data. Second, we use a VAR methodology proposed by Den Haan (2000) to study real wage cyclicality taking into account the dynamic evolution of output and real wages. Third, we evaluate statistically whether heterogeneity in the results is driven by differences in choices regarding deflators, detrending, time horizon or whether they reflect genuine differences across countries. Our findings indicate that aggregate real wages in the euro area have been on the whole largely a-cyclical since the 1970s. At the same time, real wages in most OECD countries, including a number of euro area countries, have been moderately pro-cyclical over this time period. Real wages in most OECD countries show a less pro-cyclical pattern than wages in the United States. Finally, although we find statistically significant differences in measured cyclicality depending on data and methods the results point to an important role of country heterogeneity in wage cyclicality.