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How Wages Change: Micro Evidence from the International Wage Flexibility Project

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Author Info

  • William Dickens

    ()
    (The Brookings Institution)

  • Lorenz Goette

    ()
    (University of Zurich)

  • Erica L. Groshen

    ()
    (Federal Reserve Bank of New York, and IZA)

  • Steinar Holden

    ()
    (University of Oslo, Center for Economic Studies-Information and Forschung Institute (CESifo))

  • Julian Messina

    ()
    (CSEF, University of Salerno, and European Central Bank)

  • Mark Schweitzer

    ()
    (Federal Reserve Bank of Cleveland)

  • Jarkko Turunen

    ()
    (European Central Bank)

  • Melanie Ward

    (European Central Bank, and IZA)

Abstract

How do the complex institutions involved in wage setting affect wage changes? The International Wage Flexibility Project provides new microeconomic evidence on how wages change for continuing workers. We analyze individuals’ earnings in 31 different data sets from sixteen countries, from which we obtain a total of 360 wage change distributions. We find a remarkable amount of variation in wage changes across workers. Wage changes have a notably non-normal distribution; they are tightly clustered around the median and also have many extreme values. Furthermore, nearly all countries show asymmetry in their wage distributions below the median. Indeed, we find evidence of both downward nominal and real wage rigidities. We also find that the extent of both these rigidities varies substantially across countries. Our results suggest that variations in the extent of union presence in wage bargaining play a role in explaining differing degrees of rigidities among countries.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 171.

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Date of creation: 01 Jan 2007
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Publication status: Published in Journal of Economic Perspectives, 2007, vol. 21, pages 195-214
Handle: RePEc:sef:csefwp:171

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Keywords: Wage setting; Wage change distributions; Downward nominal wage rigidity; Downward real wage rigidity;

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  1. Stephen Nickell & Glenda Quintini, 2001. "Nominal Wage Rigidity and the Rate of Inflation," CEP Discussion Papers dp0489, Centre for Economic Performance, LSE.
  2. Sherwin Rosen, 1985. "Prizes and Incentives in Elimination Tournaments," NBER Working Papers 1668, National Bureau of Economic Research, Inc.
  3. Stephen Nickell & Luca Nunziata, 2000. "Employment Patterns in OECD Countries," CEP Discussion Papers dp0448, Centre for Economic Performance, LSE.
  4. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 110(462), pages C176-95, March.
  5. Lebow David E & Saks Raven E & Wilson Beth Anne, 2003. "Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-30, October.
  6. Daniele Checchi & Claudio Lucifora, 2002. "Unions and labour market institutions in Europe," Departmental Working Papers 2002-16, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
  7. Knoppik, Christoph & Beissinger, Thomas, 2005. "Downward Nominal Wage Rigidity in Europe: An Analysis of European Micro Data from the ECHP 1994-2001," University of Regensburg Working Papers in Business, Economics and Management Information Systems 402, University of Regensburg, Department of Economics.
  8. Steinar Holden, 2004. "Wage Formation under Low Inflation," CESifo Working Paper Series 1252, CESifo Group Munich.
  9. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie Ward, 2006. "The interaction of labor markets and inflation: analysis of micro data from the International Wage Flexibility Project," Proceedings, Federal Reserve Bank of San Francisco.
  10. Joseph G. Altonji & Paul J. Devereux, 1999. "The Extent and Consequences of Downward Nominal Wage Rigidity," NBER Working Papers 7236, National Bureau of Economic Research, Inc.
  11. Rodriguez-Palenzuela, Diego & Camba-Méndez, Gonzalo & García, Juan Angel, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 0278, European Central Bank.
  12. 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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