US publicly traded companies have become more volatile over the postwar period. This trend has been the result of increased competition in product markets through deregulation, through more intensive innovation activity, and through easier access to capital markets. Since the wages of publicly traded companies are a function of the firm’s performance, the higher volatility faced by firms has affected the volatility of wages. Further, since around 1980, firms have responded to the more volatile environment by making compensations more dependent on the firm performance. As a result, wage volatility has increased very significantly for workers in publicly traded companies.
This trend at the firm level is in sharp contrast with the decline in the volatility of most macro aggregates such as GDP, investment, consumption and hours worked known as the great moderation. In several papers I show that these trends can be reconciled if we recognized the secular trend towards faster technology diffusion. When technologies diffuse faster, there is more turnover in market leadership. Further, there is less amplification of shocks through endogenous technology adoption because the stock of technologies waiting to be adopted is smaller. As a result, aggregate volatility should decline. Interestingly, this theory is also consistent with the last of any moderation in the volatlity of stock returns.