State-Level Variation in the Real Wage Response to Monetary Policy

This paper investigates the disparate state-level responses of real wages to monetary policy shocks. We report evidence that the response of real wages to monetary policy shocks is slightly procyclical. Using state-level structural vector autoregression models, we find disparity even resulting in some states exhibiting strong procyclical responses and others countercyclical real wage responses. This heterogeneity can be explained by cross-state differences in unemployment, agriculture share in state GDP, the unionization rate, and the importance of intermediate goods in state production. This last effect confirms a hypothesis proffered by Huang, Liu, and Phaneuf (2004).