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Coarse Wage-Setting and Behavioral Firms

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  • Reyes, Germán

    (Middlebury College)

Abstract

This paper shows that the bunching of wages at round numbers is partly driven by firm coarse wage-setting. Using data from over 200 million new hires in Brazil, I first establish that contracted salaries tend to cluster at round numbers. Then, I show that firms that tend to hire workers at round-numbered salaries have worse market outcomes. Next, I develop a wage-posting model in which optimization costs lead to the adoption of coarse rounded wages and provide evidence supporting two model predictions using two research designs. Finally, I examine some consequences of coarse wage-setting for relevant economic outcomes.

Suggested Citation

  • Reyes, Germán, 2024. "Coarse Wage-Setting and Behavioral Firms," IZA Discussion Papers 17039, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp17039
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    More about this item

    Keywords

    behavioral firms; bunching at round numbers; wage-setting;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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