How do wages react to the business cycle? A microeconometric approach

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Economics from the NOVA – School of Business and Economics

This study investigates the impact of the business cycle on real wages using a rich data set that matches each employee to an employer. The major innovation that this study brings to academic research is the use of two disaggregated variables as cyclical components: Job Finding Probability (JFP) and Job Separation Probability (JSP). Real wages react positively with the business cycle showing a procyclical behaviour. When JFP, JSP and the unemployment rate increase by 1 p.p., controlling for worker and firm heterogeneity, the real wage of a male worker that has an ongoing job, changes by 0.53%, -3.49% and -1.24% respectively. On the other hand, the real wage of a female worker changes by 0.42%, -0.43% and -0.85% with the same cyclical variables.