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Wage paradox at the industry level

There’s a well-known disconnect between the fluctuations of average employment and of average wages: Employment is volatile and dips during recessions, while wages tend to be quite stable. This is a problem for economic models, which have difficulty reconciling the fluctuations in productivity that must justify the changes in employment levels despite the smoothness of wages. (There are exceptions, of course, such as Rudanko (2009) and Lamadon (2014).)

Averages, however, don’t tell the whole story, as we’ve pointed out here before. So we look a little deeper at the occupational level. In the past 15 years and through two business cycles, different occupations have clearly been affected differently by both long-term and cyclical changes. Manufacturing is a notable example of a long-term decline, punctuated by more rapid change during recessions; construction has had a stark rise and fall. On the other hand, white collar service work has been more stable over time. In the graph above, we see large changes in employment among “production occupations” but see much less volatility in “installation and repair occupations” (two sets of occupations with similar skills). Construction and extraction occupations have been subject to well-known fluctuations in demand associated with the housing bubble and resource boom, and these factors show up in the employment figures. “Administrative support”—a different set of skills but at a similar level—has been relatively stable over the period and the cycle.

The employment situations look vastly different for these different occupations, but wages are starkly similar, as shown in the graph below: Wages for each occupation, after normalizing out the difference in levels, follow almost exactly the same pattern. This is strange because economists often assume that wage changes will guide the shifts of workers from one occupation to another; but it seems these shifts are occurring without wages leading them. Or, to explain it from the other direction: If demand is low in an occupation, restricting workers’ ability to work there (i.e., reducing the number of available jobs) should depress wages; but, again, wages do not seem to follow the changes in the levels of workers in these occupations. There are potential explanations, of course, but these facts challenge our initial beliefs.

How these graphs were created: Go to “Browse data by release” and on the final page is “Weekly and Hourly Earnings from the Current Population Survey.” Choose “Classified by occupation and sex.” For the top graph, choose “number of workers” and for the bottom graph choose “median usual earnings.” Finally, choose quarterly data and then the four occupations we’ve shown using data for both sexes. Normalize the data to be 100 at the trough of the Great Recession, June 2009.

Suggested by David Wiczer

View on FRED, series used in this post: LEU0254498800Q, LEU0254505100Q, LEU0254509100Q, LEU0254512900Q, LEU0254552200Q, LEU0254558500Q, LEU0254562500Q, LEU0254566200Q

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