The Real Wage Cyclicality of Newly Hired and Incumbent Workers in Germany

Several recent macroeconomic models assume that real wages are rigid. The wage rigidity of newly hired workers assumes a crucial role in these models, as the decision of whether to open a vacancy is primarily influenced by real hiring wages. This article analyses the cyclical behaviour of real wages in Germany. It considers recent concerns that not controlling for cyclical job up and downgrading leads to biased results. The results indicate that wages are not rigid – neither for all workers nor for newly hired workers – but instead respond considerably to business cycle conditions.