Flexibility of new hires' earnings in Ireland

Two recent papers that are able to distinguish between the wage flexibility of new hires, incumbent workers and job changers provide opposite results. We use an administrative tax database on earnings and the data from Household Finance and Consumption Survey in Ireland to examine this issue and find that the earnings of new hires are substantially more flexible than those of the existing workers. This is driven entirely by the flexibility of earnings of new hires from unemployment, while earnings of job changers do not appear to behave differently than earnings of existing workers. The findings are robust to different econometric specifications, including controls for compositional shifts, age, education, occupation, and sector. We find that earnings of new hires from unemployment are more procyclical for workers with less valuable outside options, i.e., less educated workers and workers who cannot afford to wait out until retirement. Overall, our results indicate that wage rigidity may not be a suitable device to generate sufficient unemployment volatility in macroeconomic models for Ireland.