Unequal Wage Cyclicality: Evidence, Theory, and Implications for Labor Market Volatility
Abstract
This study provides evidence of unequal wage cyclicality: real wages in high-wage jobs are strongly procyclical, whereas those in middle- and low-wage jobs are largely acyclical. To explain why lower-wage jobs exhibit weaker wage cyclicality, the paper develops a search-and-matching model featuring job ladder and vacancy chain effects from on-the-job search and replacement hiring. During expansions, firms face greater opportunities to replace poorly matched workers with better-matched candidates, raising the value of their outside option and thereby suppressing wage increases. These mechanisms also amplify cyclical fluctuations in labor market flows. The calibrated model explains three-fourths of observed unemployment volatility.
Fields of Study & Subjects
Labor market dynamics and wage inequality
Monetary Policy and Economic Impact
Economic Theory and Policy
Publication details
- Journal / source
- Journal of Political Economy Macroeconomics
- Volume
- 4
- Issue
- 2
- Pages
- 343–384
- Publication date
- 15 January 2026
- Language
- EN