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Downward Real Wage Rigidity and Equal Treatment Wage Contracts: Theory and Evidence

Author

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  • Andrew Snell

    (University of Edinburgh)

  • Heiko Stuber

    (Friedrich-Alexander-University Erlangen-Nuremberg)

  • Jonathan Thomas

    (University of Edinburgh)

Abstract

Recent dynamic contracting models of downward real wage rigidity with "equal treatment" — newly hired workers cannot price themselves into jobs by undercutting incumbents — imply that real wages are relatively rigid in "bad" times but upwardly flexible during "good" times. We use an administrative panel dataset to establish that such asymmetries are a feature of West German labor markets. We find that the elasticity of real wages with respect to output is very close to zero in downswings but positive and highly significant in upswings. In a separate analysis we find that after controlling for match fixed effects, the cyclicality of new hire wages is approximately the same as that for incumbent wages, regardless of whether or not they joined the establishment from unemployment. This is supportive of equal treatment. We also show that a four parameter version of the equal treatment contracting model of Snell and Thomas (2010) can replicate reasonably well the salient time series properties and co-properties of real wages, output, and unemployment, in particular the asymmetric response of wages to output that we find in the data. (Copyright: Elsevier)

Suggested Citation

  • Andrew Snell & Heiko Stuber & Jonathan Thomas, 2018. "Downward Real Wage Rigidity and Equal Treatment Wage Contracts: Theory and Evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 265-284, October.
  • Handle: RePEc:red:issued:18-146
    DOI: 10.1016/j.red.2018.06.001
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    Cited by:

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    3. Muehlemann, Samuel & Dietrich, Hans & Pfann, Gerard & Pfeifer, Harald, 2022. "Supply Shocks in the Market for Apprenticeship Training," Economics of Education Review, Elsevier, vol. 86(C).
    4. Shobande Olatunji Abdul, 2020. "Fiscal Rule in Africa," Open Economics, De Gruyter, vol. 3(1), pages 112-120, January.
    5. Daniel Schaefer & Carl Singleton, 2021. "The Extent of Downward Nominal Wage Rigidity: New Evidence from Payroll Data," Economics Discussion Papers em-dp2021-22, Department of Economics, University of Reading.
    6. Fei Peng & Sajid Anwar & Lili Kang, 2020. "Job Movement and Real Wage Flexibility in Eastern and Western Parts of Germany," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(4), pages 764-789, October.
    7. Fei Peng & Sajid Anwar & Lili Kang, 0. "Job Movement and Real Wage Flexibility in Eastern and Western Parts of Germany," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 0, pages 1-26.

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    More about this item

    Keywords

    Business cycles; Employment; Unemployment; Real wage rigidity; GDP growth; Models with panel data;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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