Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/295934 
Year of Publication: 
2024
Series/Report no.: 
IZA Discussion Papers No. 16911
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
We provide evidence showing, for the first time, that the sensitivity of real wages to the business cycle is much stronger for higher-wage workers than for lower-wage workers. Using matched employer-employee data for Portugal covering the period 1986-2021, we show that a one percentage point increase in the unemployment rate is associated with a decrease in real hourly wages of workers in the 90th percentile of the conditional wage distribution of around 1.3%, contrasted with 0.8% for those in the 10th percentile. This gap is even larger for newly hired workers – the estimates for the 90th percentile workers are double of those in the bottom decile. This pattern also holds for bargained wages and the wage cushion. These results can be explained by composition effects and heterogeneous sensitivities of firms and collective bargaining agreements (CBAs) to the cycle. First, the considerable gap in new hires' cyclicality arises mostly from match quality fluctuations over the business cycle and is sharply attenuated after we account for job match composition. Second, by estimating cyclicality coefficients for each firm/CBA, we find that firms and CBAs tend to provide a lower degree of insurance against aggregate cyclical fluctuations to higher paid individuals. These findings provide strong empirical evidence on the role of business cycles as amplifiers of inequality trends.
Subjects: 
wage cyclicality
quantile regressions
match quality
collective bargaining agreements
JEL: 
E24
E32
J64
Document Type: 
Working Paper

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