John C. Haltiwanger

English

Research Papers in Economics

FEDERAL  RESERVE  BANK  OF  ST. LOUIS
113
MAY/JUNE  1999
Commentary
John C. Haltiwanger
T
his ﬁne paper ﬁts into a growing litera-
ture in macroeconomics that empha-
sizes the idea that it is difﬁcult, if not
impossible, to understand aggregate ﬂuctua-
tions without understanding the underlying
behavior of heterogeneous microeconomic
agents.  It is self-evident that individual
households, workers and businesses have
heterogeneous characteristics and are subject
to idiosyncratic events that yield dramatical-
ly different outcomes at the microeconomic
level.  This heterogeneity in microeconom-
ic outcomes typically dwarfs aggregate
ﬂuctuations so that for most households
and businesses, the macro economy is a rel-
atively unimportant factor in determining
their fortunes.  In spite of this overwhelm-
ing micro heterogeneity, macroeconomists
have traditionally abstracted from this het-
erogeneity because the common view is
that the micro heterogeneity washes out 
in the aggregate.  Thus, macroeconomists
have traditionally developed models
describing the behavior of the typical ﬁrm
or the typical worker and worried relatively
little about the differences in outcomes
across economic agents.  
The growing availability of micro panel
data on households and businesses (and in
some cases linked employer-employee
micro data) has made it increasingly clear
that this traditional approach misses impor-
tant aspects of aggregate ﬂuctuations.  That
is, there is often a strong connection (albeit
with questions about the direction of
causality) between the aggregate ﬂuctuations
and the nature and extent of heterogeneity of
outcomes across agents.  Technically, the
issue is often whether there is a connec-
tion between the ﬂuctuations in the ﬁrst
and higher moments of the distributions 
of outcomes.  In the current paper, this is
precisely the question, as the paper inves-
tigates the relationship between the distri-
bution of wage adjustments at the micro
level and inﬂation.
The paper is primarily an empirical
exercise.  The question at hand is whether
changes in the rate of inﬂation have a neu-
tral effect on the distribution of wage adjust-
ments at the micro level.  A simple view is
that inﬂation should affect all participants
similarly (i.e., all relevant  parties simply
care about real wages) and thus inﬂation
should have little or no impact on the dis-
tribution of wage adjustments.  The strik-
ing ﬁnding that emerges is that inﬂation 
is dramatically non-neutral in terms of its
impact on the distribution of wage adjust-
ments.  Moreover, the pattern of non-
neutrality is quite interesting.  Wage changes
at the upper tail of the wage change distri-
bution respond to a much greater extent
than wage changes in the lower tail of the
wage distribution.  The authors also inves-
tigate two related interesting questions
about the nature of this non-neutrality.
First, they ask the question as to whether
there are bellweather jobs—in the sense
that perhaps the non-neutrality is such
that wages respond to inﬂation for some
types of jobs more quickly than for others.
They ﬁnd little or no evidence for bell-
weather jobs.  Second, they ask the question
about whether this non-neutrality has
changed over time, with a particular emphasis
on the 1990s.  The motivation for the
focus on the latter is the popular percep-
tion that wage responses to inﬂation have
been mitigated during the 1990s due to
increased job insecurity and that this
would, in turn, impact the nature of the
non-neutrality.  They ﬁnd little or no evi-
dence of changes in the non-neutrality.
While I ﬁnd the basic facts and related
empirical exercises quite interesting, this
work is somewhat difﬁcult to interpret,
given the lack of much of an overall con-
ceptual framework to help us understand
the possible sources of connections between
changes in inﬂation and changes in the
John C. Haltiwanger is a professor of economics at the University of Maryland.FEDERAL RESERVE BANK OF ST. LOUIS
114
MAY/JUNE 1999
distribution of wage adjustments.  This is
not really a criticism of the current paper,
but rather illustrates the need for a con-
ceptual framework to help interpret these
interesting ﬁndings.  Put differently, we
need to consider the sources of hetero-
geneity in wage adjustments at the most
basic level and how this heterogeneity is
likely to interact with changes in the rate
of inﬂation.
Many factors may be at work in the
underlying distribution of wage adjust-
ments.  Changes in relative labor supply
and labor demand for workers of different
characteristics (both those that are easily
observable to the researcher and those that
are not) are obviously important in this
context.  The institutional structure (e.g.,
unionization) and differences in the manner
that wages are determined by sector or ﬁrm
also are likely to be important.
In considering these alternative pos-
sible factors, in light of the ﬁndings in this
paper, it is useful to consider what we know
about changes in the structure of labor mar-
kets during the sample period for this
analysis.  One of the primary recent empir-
ical ﬁndings from applied labor economics
research is the observation that there have
been systematic increases in the dispersion
of wages across workers during the last
few decades.  While the sources of this
rising wage inequality are still somewhat
in dispute, there is a growing consensus
that this rising wage inequality is due to a
rising relative demand for skilled workers.
The sources of the latter might be changing
technology (broadly deﬁned) or changing
world markets but, nevertheless, the return
to being skilled has risen during this period
of time.  These fundamental changes in the
dispersion of wages are closely linked to
the changes in the distribution of wage
adjustments.  Moreover, the rising wage
inequality was especially dramatic during
the 1970s and 1980s—a period in which
the rate of inﬂation is high and there are
large associated changes in the distribution
of wage adjustments.  Thus, one question
that arises is whether any aspects of their
ﬁndings are spurious.  Perhaps what is dri-
ving the results are the underlying factors
that cause rising wage inequality and that
the timing of these factors corresponds to
a period with many dramatic changes in
the U.S. economy.  
Another related and relevant hypoth-
esis is that it is no coincidence that the
observed long-run structural adjustments
in the labor market were bunched during
this period of volatile business-cycle ﬂuc-
tuations.  That is, either the business-cycle
ﬂuctuations caused a change in the timing
of the structural adjustment, or the business-
cycle ﬂuctuations were partly due to the
intense period of structural adjustment.
Moreover, since this period of turbulence
in labor markets is also associated with high
and volatile rates of inﬂation, this may
underlie the connection between inﬂation
and the distribution of wage adjustments.
All of this discussion is speculative, how-
ever.  The main point is that it will be difﬁ-
cult to sort out the factors that generate
this paper’s interesting results without a
conceptual structure (and associated
empirical analysis) to help us understand
the factors driving the distribution of wage
adjustments and the potential link to inﬂa-
tion.  More generally, the question is whe-
ther the results are driven mostly by the
turbulent events of the 1970s and 1980s—
a period in which there were substantial
ﬂuctuations in macro variables like inﬂa-
tion and unemployment, and a period of
substantial structural change in the econ-
omy and labor market.
I have some other relatively minor con-
cerns about speciﬁc aspects of the analysis.
While the CSS appears to be a very rich and
unique dataset, there are concerns about
the representativeness of the sample.  It is
intended to be representative of large
employers in the area.  Since the sample
period here is so long, these concerns may
be especially important.  That is, not only
is one concerned about how representative
the sample is at a given moment, but also
whether its representativeness has changed
over time.   A somewhat related concern 
is that their analysis is in terms of the
unweighted wage adjustment distribution
—an interesting alternative would be to
consider the hours-weighted wage-adjust-FEDERAL RESERVE BANK OF ST. LOUIS
115
MAY/JUNE 1999
ment distribution.  If their results are driven
by occupation/employers with small hours
weights, then the results are of less interest.
Finally, the authors make a relatively
big deal about the ﬁnding of weak or nega-
tive autocorrelations in wage adjustments.
They want to interpret this as evidence
against bellweather occupation and jobs.
This interpretation may be correct, but
there may be a number of factors under-
lying the weak or negative autocorrelations
in changes observed in the data.  For
example, it may be that wage adjustments
are lumpy at the micro level (due perhaps
to some rigidities or ﬁxed adjustment
costs) which can lead to weak and nega-
tive autocorrelation.  This would yield a
very different interpretation of the ﬁnd-
ings.  To sort out these alternatives, we
need more structure and further analysis.  
To sum up, this paper represents an
installment on a very nice research agenda
with a rich and unique dataset.  This par-
ticular installment offers some interesting
new “facts.”  While there may be some
concerns about the robustness of these
facts to measurement concerns and about
whether the results are idiosyncratic to the
turbulence of the 1970s and 1980s, they
are interesting and deserve further consid-
eration.  We need more structure to inter-
pret and understand these new facts, but
that awaits another installment from these
authors or in studies stimulated by these
new facts.MAY/JUNE 1999
FEDERAL RESERVE BANK OF ST. LOUIS
116

Firms' wage adjustments: a break from the past - commentary

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Firms' wage adjustments: a break from the past - commentary

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