The Importance of the Part‐Time and Participation Margins for Real Wage Adjustment

• Published date: 01 February 2022
• Author: MARY C. DALY,BART HOBIJN
• Date: 01 February 2022
• DOI: http://doi.org/10.1111/jmcb.12895

DOI: 10.1111/jmcb.12895

MARY C. DALY

BART HOBIJN

The Importance of the Part-Time and Participation

Margins for Real Wage Adjustment

We introduce a decomposition of the growth in real median usual weekly

earnings of full-time wage and salary earners into parts due to earnings in-

creases of those who remain employed, the intensive margin, and due to

changes in those who are employed, the extensive margin. The intensive

margin is procyclical and dominates during expansions. The extensivemar-

gin is countercyclical and important during downturns, especially during the

Great and COVIDRecessions. The extensive margin is mainly driven by en-

tries from and exits to part-time employment and nonparticipation, not un-

employment.

JEL codes E24, J3, J6

Keywords: business cycle, labor market dynamics, wagegrowth

A     variability over time

than standard macro-economic models predict and observed movements appear only

modestly related to business cycle uctuations.1This limited procyclicality is illus-

trated in Figure 1.

Four different explanations have emerged to explain this fact. The rst is that the

aggregate labor supply elasticity is much higher than estimates based on individual-

We are grateful to Alessandro Barbarino, Marianne Bitler, Michael Elsby, Henry Hyatt, Lisa Kahn,

Thomas Lemieux, Chris Nekarda, Ay¸segül ¸Sahin, Gary Solon, Eric Swanson, and seminar participants at

the Board of Governors of the Federal Reserve System, the Kansas City, New York, St. Louis, and San

Francisco Federal Reserve Banks, the NBER Labor Studies group, the Riksbank, OECD, and Tinbergen

Institute for useful suggestions and comments, and to Erin Crust for her excellent research assistance. The

views expressed in this paper are those of the authors and do not necessarily reect the position of the

Federal Reserve Bank of San Francisco or the Federal Reserve System.

M C. Dis a President and Chief Executive Ofcer of the Federal Reserve Bank of San Francisco

(E-mail: mary.daly@sf.frb.org). B H is a Professor of Economics at the W.P. Carey School of

Business, Arizona State University (E-mail: bhobijn@asu.edu).

Received July 9, 2020; and accepted in revised form August 19, 2021.

1. See Abraham and Haltiwanger (1995) for a survey of empirical studies of real-wage growth over

the business cycle.

Journal of Money, Credit and Banking, Supplement to Vol. 54, No. S1 (February 2022)

Published 2021. This article is a U.S. Government work and is in the public domain in the

USA.

90 :MONEY,CREDIT AND BANKING

Fig 1. Real WageGrowth and the Unemployment Rate.

N: Bureau of Labor Statistics.

level data.2The second is that wages are smoothed out over long-term employment

relationships.3The third is that there are rigidities that prevent wages from adjusting

in response to changing economic conditions.4The nal, and the focus of this paper,

is the countercyclical pressure on aggregate wages that comes from changes in the

composition of the pool of employed workers over the business cycle.

In this paper, we show that changes in the composition of the full-time employed

offset half of the procyclicality of wage growth of those who remain employed.5En-

try into and exit out of full-time employment has had a particularly large impact on

aggregate wage growth during the Great and COVID Recessions. Of the three types

of entries and exits we consider (to and from part-time/self-employment, unemploy-

ment, and not-in-labor-force), the unemployment margin has the smallest impact on

the cyclicality of aggregate real wage growth. The participation margin, which has

2. Hansen (1985) and Rogerson (1988) analyze this in the context of real business cycles. Hagedorn

and Manovskii (2008) make this argument in the context of a labor search model.

3. See Beaudry and DiNardo (1991) and Kudlyak (2014), for example.

4. See Card and Hyslop (1997), Lebow, Saks, and Wilson (2003), Dickens et al. (2007), Barattieri,

Susanto, and Peter (2014), Daly and Hobijn (2014), Gertler and Trigari (2009), among many.

5. In this paper we focus on this composition effect in terms of persons employed rather than

hours worked.