Since the Global Financial Crisis, the reaction of wages to changes in employment has been weaker than before. This paper proposes an explanation based on the change in the response of labour productivity (output per worker) to an increase in employment - from a mute reaction to a negative one - induced, in turn, by the more prolonged cyclical phase.
A theoretical model suggests that the longer the cyclical phase, the fewer incentives firms have to change the intensive margin of labour instead of the number of employees (labour hoarding). Hence, the reaction of productivity to changes in demand, which is procyclical in the face of transitory shocks, becomes countercyclical when there are persistent shocks to demand, dampening the response of wages to employment. The empirical analysis validates the findings of the theoretical model.
