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Wage rigidity: a look inside the firm

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Abstract

This paper tests for nominal salary rigidity using panel data from two large service-sector firms. Distributions of the firms' salary changes exhibit nominal rigidity: few nominal pay cuts, a pile-up of observations at zero, and positive skewness and asymmetry. In addition, these characteristics become more pronounced in periods of low inflation. These results are much stronger than those found in the previous literature. Further analysis shows that the sizable measurement error in the PSID and the fact that establishment surveys typically follow average wages within jobs may bias the results in the previous literature toward rejecting downward nominal wage rigidity.

Suggested Citation

  • Beth Anne Wilson, 1999. "Wage rigidity: a look inside the firm," Finance and Economics Discussion Series 1999-22, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:1999-22
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    References listed on IDEAS

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    1. Erica L. Groshen & Mark E. Schweitzer, 1994. "The effects of inflation on wage adjustments in firm-level data: grease or sand?," Working Papers (Old Series) 9418, Federal Reserve Bank of Cleveland.
    2. David Card & Dean Hyslop, 1997. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 71-122, National Bureau of Economic Research, Inc.
    3. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1993. "Hierarchies and compensation: A case study," European Economic Review, Elsevier, vol. 37(2-3), pages 366-378, April.
    4. David E. Lebow & David J. Stockton & William L. Wascher, 1995. "Inflation, nominal wage rigidity, and the efficiency of labor markets," Finance and Economics Discussion Series 95-45, Board of Governors of the Federal Reserve System (U.S.).
    5. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
    6. Brown, James N & Light, Audrey, 1992. "Interpreting Panel Data on Job Tenure," Journal of Labor Economics, University of Chicago Press, vol. 10(3), pages 219-257, July.
    7. Kahn, Shulamit, 1997. "Evidence of Nominal Wage Stickiness from Microdata," American Economic Review, American Economic Association, vol. 87(5), pages 993-1008, December.
    8. David E. Lebow & Raven E. Saks & Beth Anne Wilson, 1999. "Downward nominal wage rigidity: evidence from the employment cost index," Finance and Economics Discussion Series 1999-31, Board of Governors of the Federal Reserve System (U.S.).
    9. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
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    Cited by:

    1. Götte, Lorenz & Huffman, David B., 2005. "Do Emotions Improve Labor Market Outcomes?," IZA Discussion Papers 1895, Institute of Labor Economics (IZA).
    2. Thomas Beissinger & Chritoph Knoppik, 2005. "Sind Nominallöhne starr? Neuere Evidenz und wirtschaftspolitische Implikationen," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 6(2), pages 171-188, May.
    3. Jacqueline Dwyer, 2003. "Nominal Wage Rigidity in Australia," Australian Journal of Labour Economics (AJLE), Bankwest Curtin Economics Centre (BCEC), Curtin Business School, vol. 6(1), pages 5-24, March.
    4. Bruce Fallick & Daniel Villar Vallenas & William L. Wascher, 2016. "Downward Nominal Wage Rigidity in the United States During and After the Great Recession," Finance and Economics Discussion Series 2016-001r1, Board of Governors of the Federal Reserve System (U.S.), revised 15 May 2020.
    5. Fehr, Ernst & Goette, Lorenz, 2005. "Robustness and real consequences of nominal wage rigidity," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 779-804, May.
    6. Castellanos Pascacio Sara Gabriela & García Verdú Rodrigo & Kaplan David, 2004. "Wage Rigidities in Mexico: Evidence from the Administrative Records of the Mexican Social Security Institute (Instituto Mexicano del Seguro Social)," Working Papers 2004-03, Banco de México.
    7. Fallick, Bruce & Villar, Daniel & Wascher, William, 2022. "Downward nominal wage rigidity in the United States in times of economic distress and low inflation," Labour Economics, Elsevier, vol. 78(C).
    8. Steinar Holden & Fredrik Wulfsberg, 2007. "Are real wages rigid downwards?," Working Paper 2007/01, Norges Bank.
    9. Carlsson, Mikael & Westermark, Andreas, 2007. "Optimal Monetary Policy under Downward Nominal Wage Rigidity," Working Paper Series 206, Sveriges Riksbank (Central Bank of Sweden).
    10. Peter Thompson & Mihaela Pintea, 2008. "Sorting, Selection, and Industry Shakeouts," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 33(1), pages 23-40, August.
    11. Yi-Ping Tseng, 2001. "Individuals’ Wage Changes in Australia 1997-2000," Melbourne Institute Working Paper Series wp2001n04, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    12. Kimura, Takeshi & Ueda, Kazuo, 2001. "Downward Nominal Wage Rigidity in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 15(1), pages 50-67, March.
    13. Kuroda, Sachiko & Yamamoto, Isamu, 2003. "Are Japanese Nominal Wages Downwardly Rigid? (Part II): Examinations Using a Friction Model," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 31-68, August.

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    Keywords

    Wages; Business enterprises;

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