Wage Cyclicality and Composition Bias in the Norwegian Economy*

AuthorBjorn Dapi
Publication Date01 Oct 2020
Scand. J. of Economics 122(4), 1403–1430, 2020
DOI: 10.1111/sjoe.12378
Wage Cyclicality and Composition Bias in
the Norwegian Economy*
Bjorn Dapi
Statistics Norway,NO-0177 Oslo, Norway
Using employer–employee register data, I estimate the real wage semi-elasticity of aggregate
unemployment for the years 1997–2014 in the Norwegian private sector. An increase of 1
percentage point in aggregate unemployment is associated with an averagedecrease of 2 percent
in (total) daily wages. Although Norway has influential labor market institutions, wages in the
Norwegian private sector are quite sensitive to business-cycle fluctuations. Gender differences
in wage cyclicality and compositional variation are considerable. Men have significantly more
procyclical wages than women, and appear more likelyto upgrade procyclically to better-paying
Keywords: Job upgrading; labor market institutions; real wage rigidity
JEL classification:E24; E32; J31; J64
I. Introduction
In recent years, there has been an increasing number of studies exploring
how real wages evolve in the course of the business cycle. This topic
attracts interest because it shows how the economy, and the labor market
in particular, adjust to business-cycle fluctuations. The use of micro-level
data is an important component in the wage cyclicality literature because
this makes it possible to distinguish between wage sensitivity to business
cycles and cyclical variation in the composition of employed workers.
However, among studies of wage cyclicality that are based on micro-
level data, countries with low union density and low collective agreement
coverage such as the United Kingdom and the United States are over-
represented. In the current study, I estimate wage cyclicality in the
Norwegian private sector, which, unlike the United Kingdom and the United
States, has relatively comprehensive labor market regulations.
*I am grateful to Steinar Holden, Bernt Bratsberg, Victoria Sparrman, Edwin Leuven, Robert
Hart, PedroPortugal, Monique de Haan, Ådne Cappelen, TerjeSkjerpen, Lars Kirkebøen, Andreas
Fagereng,and two anonymous referees. Workwas carried out at Statistics Norway and University
of Oslo, with data from the Frisch Centre and Statistics Norway.
The editors of The Scandinavian Journal of Economics 2019.
1404 Wage cyclicality and composition bias in the Norwegian economy
Fig. 1. Unemployment in some OECD countries [Colour figure can be viewed at
Source: OECD.statand Statistics Norway.
Furthermore, as Figure 1 shows, Norway is a country with relatively
low unemployment, which was also little affected by the Great Recession.
Although expansionary monetary and fiscal policy responses play an
important role (Holden and Sparrman, 2018), the limited negative
consequences of the Great Recession on the Norwegian economy might
indicate that wages are particularly responsive in the Norwegian private
sector. At the same time, there is evidence of wage rigidity in Norway.
Holden and Wulfsberg (2009) document downward real-wage rigidity
at industry level in Norway in the period 1973–1999. They also find
that downward real-wage rigidity reduced the incidence of large cuts
in Norwegian real wages, while relatively low cuts were not dampened.
So, to what extent do Norwegian real wages respond to business-cycle
Cyclical sensitivity of average real wages might be a direct effect of
business-cycle fluctuations on real wages, as well as an indirect effect
as a result of changes in employee composition. Originating with Bils
(1985), the estimation of wage cyclicality using individual-level data has
highlighted that compositional changes in the employee population can lead
to a countercyclical bias in the estimation of wage cyclicality of individual
wages. For example, workers receiving low wages might be more likely
than workers receiving high wages to find employment during economic
expansions and to lose employment in recessions. This causes a dampening
effect on average wages during expansions. Compositional changes of firms
can also dampen the cyclicality of average wages if firms that pay low
The editors of The Scandinavian Journal of Economics 2019.

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