Wage rigidity and job creation

Recent research in macroeconomics emphasizes the role of wage rigidity in accounting for the volatility of unemployment fluctuations. We use worker-level data from the CPS to measure the sensitivity of wages of newly hired workers to changes in aggregate labor market conditions. The wage of new hires, unlike the aggregate wage, is volatile and responds almost one-to-one to changes in labor productivity. We conclude that there is little evidence for wage rigidity in the data. •Construction of a time series for wages of newly hired workers.•Data are consistent with long-term wage contracting.•Wages of new hires respond strongly to changes in productivity.•Elasticity of 0.8 is an appropriate calibration target for search models.•Wage rigidity not likely to be the sole reason for unemployment volatility.