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The Cost of Wage Rigidity

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  • Ester Faia
  • Vincenzo Pezone

Abstract

Private efficiency of wage rigidity has taken centre stage in economics. Measuring its effects has proven elusive for lack of actual wage data. Using a unique confidential labour contract-level dataset matched with firm-level high-frequency asset prices, we find robust evidence that firms’ stock prices and employment fluctuate more in response to monetary policy announcements, the higher the degree of wage rigidity. Hand-collected information on the periods across renegotiations of collective bargaining agreements allow us to construct an accurate and predetermined measure of wage rigidity. We find that the amplification induced by wage rigidity is stronger for firms with high labour intensity, low profitability, and a large share of workers with more rigid contracts.

Suggested Citation

  • Ester Faia & Vincenzo Pezone, 2024. "The Cost of Wage Rigidity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(1), pages 301-339.
    • Handle: RePEc:oup:restud:v:91:y:2024:i:1:p:301-339.
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    File URL: http://hdl.handle.net/10.1093/restud/rdad020
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