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To: gpowell who wrote (230)	5/11/2003 7:44:43 PM
From: Don Lloyd	Read Replies (1) \| Respond to of 445

gpowell, The quoted paragraph is not in accordance with your previous expectations - you were making a case for a wage and performance ranking system within the same job class. Delong is saying average wages appear countercyclical because below average jobs are disproportionately lost. This is more or less correct, but when all job classes are aggregated, and unless you are willing to claim that there is an inverse pay scale for either above/below average workers or jobs, the effect is much the same. Correcting for this "composition of employment" effect, the balance of the evidence is that in the average business cycle real wages are slightly procyclical: a particular job with particular skill requirements tends to carry higher real wages in a boom than in a recession (see Barsky and Solon, 1993). Real wages are high in booms because demand for investment goods is high in booms--and thus the derived demand for labor is high in booms as well. A procyclical wage seems to invalidate your pay for rank system. I don't think so. Correcting for the composition effect is not relevant since it was effectively the 'composition effect' itself that I was suggesting as a source of change in 'average wages' for the people who are interested in average wages, which I am not. Nor am I interested in 'real wages' as it is just an arbitrary adjustment based on an arbitrary weighting of an arbitrary basket of goods prices. The pay for rank system would either reflect reality to some degree or it wouldn't, but neither average wages or changes in the prices of goods over time would have any significance to a system that applies to one specific job at one specific instant. Regards, Don