Wage Cyclicality and Composition Bias in the Norwegian Economy*

• DOI: http://doi.org/10.1111/sjoe.12378
• Published date: 01 October 2020
• Date: 01 October 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

bjorn.dapi@ssb.no

Abstract

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

firms.

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.

C

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

wileyonlinelibrary.com]

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

fluctuations?

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

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The editors of The Scandinavian Journal of Economics 2019.