Abstract

Over the last several decades, real wages in the U.S. have become less procyclical and indeed turned countercyclical in the twenty-first century. This paper shows that the change in real wage cyclicality may be entirely accounted for by changes in cyclical composition effects. To explain this fact, I build a general equilibrium model in which workers have heterogeneous skills for a variety of tasks which are subject to non-uniform labor demand shocks. Developing a method to estimate the multidimensional skill distribution, I show that skills have become more specific and more heterogeneous across individuals, both of which push towards large composition effects. Shifts in the composition of workers offers a frictionless rationalization for the representative agent labor supply shocks or movements in the labor wedge which have been emphasized elsewhere.