Cyclical Co-Movements in Industrial Labor and Product Markets: Theory and Evidence

Abstract

We establish the theoretical connection between industrial labor and product markets within the contractual wage-rigidity new Keynesian explanation of business cycles. We estimate time-series and cross-sectional regressions for 28 private two-digit (S.I.C.) industries and find: 1) greater uncertainty is associated with upward flexibility of the nominal wage and moderates the countercyclical response of the real wage to aggregate demand shocks; 2) an upwardly rigid nominal wage response to energy price shocks reduces the real contractionary effects of these shocks; 3) downwardly inflexible nominal wages are associated with downwardly rigid prices in response to productivity shocks.

JEL Classification: E32