How Important are Composition Effects for Aggregate Wage Growth?

Previous studies have ascribed the modest procyclicality of average hourly earnings growth to composition bias. These studies argue that by placing more weight on low-skill workers during expansions than during recessions, average hourly earnings growth generates a downward bias in estimated cyclicality. This paper uses data from the Survey of Income and Program Participation to document that this downward bias is, instead, the consequence of an aggregation effect that involves a relative-earnings weighting of individual wage growths. We also find that the aggregation effect largely accounts for the lower level of average hourly earnings growth as compared to other aggregate wage growth measures.