Worker compensation and macroeconomic shocks in service- and goods-producing sectors

Identifying the differing reactions of service- and goods-producing industries' employee earnings to shocks to real output growth, inflation, and the stance of monetary policy will help firms better manage their supply chain operations. Operations managers regularly take into account the differences between the manufacturing and service sectors with issues related to demand, inventory and logistics. To date, however, differences in compensation between these sectors have not been fully taken into account. In this paper, the relationship among these earnings time series and the aggregate measures of economic activity is examined in the context of generalised impulse response functions generated from a vector autoregression (Koop et al., 1996; Pesaran and Shin, 1998). Results from the time series analysis indicate that the response of compensation varies by industry. For example, monetary policy shocks tend to raise the growth rate in compensation in both the service sector and the goods-producing sector but the former effect is more pronounced.