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Wages are flexible, aren?t they? evidence from monthly micro wage data

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  • Patrick Lünnemann

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  • Ladislav Wintr

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Abstract

his paper assesses the degree of wage flexibility in Luxembourg using an administrative data set on individual base wages covering the entire economy over the period 2001?2006 with monthly frequency. We find that the wage flexibility at the discretion of the firm is rather low once we limit measurement error and remove wage changes due to institutional factors (indexation, changes in statutory minimum wage, age and marital status). The so adjusted frequency of wage change lies between 5% and 7%. On average, wages change less often than consumer prices. In addition, less than one percent of (nominal) wages are cut both from month to month and from year to year. Given full automatic indexation of wages covering vast majority of employees in Luxembourg, wages appear to be subject to substantial downward real wage rigidity. Finally, wage changes tend to be highly synchronised as they are concentrated around the events of wage indexation and the month of January.

Suggested Citation

  • Patrick Lünnemann & Ladislav Wintr, 2009. "Wages are flexible, aren?t they? evidence from monthly micro wage data," BCL working papers 39, Central Bank of Luxembourg.
  • Handle: RePEc:bcl:bclwop:bclwp039
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    1. repec:eee:macchp:v2-297 is not listed on IDEAS
    2. Taylor, J.B., 2016. "The Staying Power of Staggered Wage and Price Setting Models in Macroeconomics," Handbook of Macroeconomics, Elsevier.
    3. M. Druant & S. Fabiani & Gabor Kezdi & Ana Lamo & Fernando Martins & R. Sabbatini, 2009. "How are Firms’ Wages and Prices Linked: Survey Evidence in Europe," Working Papers w200918, Banco de Portugal, Economics and Research Department.
    4. Luca Marchiori & Olivier Pierrard, 2012. "LOLA 2.0: Luxembourg OverLapping generation model for policy Analysis," BCL working papers 76, Central Bank of Luxembourg.
    5. Lünnemann, Patrick & Wintr, Ladislav, 2010. "Downward wage rigidity and automatic wage indexation: evidence from monthly micro wage data," Working Paper Series 1269, European Central Bank.
    6. Juillard, M. & Le Bihan, H. & Millard, S., 2013. "Non-uniform wage-staggering: European evidence and monetary policy implications," Working papers 442, Banque de France.
    7. Georgiadis, Andreas & Manning, Alan, 2014. "The volatility of earnings: evidence from high-frequency firm-level data," LSE Research Online Documents on Economics 60443, London School of Economics and Political Science, LSE Library.
    8. Druant, Martine & Fabiani, Silvia & Kezdi, Gabor & Lamo, Ana & Martins, Fernando & Sabbatini, Roberto, 2012. "Firms' price and wage adjustment in Europe: Survey evidence on nominal stickiness," Labour Economics, Elsevier, vol. 19(5), pages 772-782.
    9. Jósef Sigurdsson & Rannveig Sigurdardottir, 2011. "Evidence of Nominal Wage Rigidity and Wage Setting from Icelandic Microdata," Economics wp55, Department of Economics, Central bank of Iceland.
    10. Marianna Cervena, 2012. "Base Wage Rigidities: Evidence From a Survey of Slovak Firms," Working and Discussion Papers WP 3/2012, Research Department, National Bank of Slovakia.
    11. Eijffinger, S.C.W. & Grajales Olarte, A. & Uras, R.B., 2015. "Heterogeneity in Wage Setting Behavior in a New-Keynesian Model," Discussion Paper 2015-024, Tilburg University, Center for Economic Research.
    12. Huang, Kevin X.D. & Meng, Qinglai, 2012. "Increasing returns and unsynchronized wage adjustment in sunspot models of the business cycle," Journal of Economic Theory, Elsevier, vol. 147(1), pages 284-309.
    13. Marianna Cervena, 2012. "Labor Cost Adjustment: Evidence From a Survey of Slovak Firms," Working and Discussion Papers WP 4/2012, Research Department, National Bank of Slovakia.
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    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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