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Measuring Downward Nominal and Real Wage Rigidity - Why Methods Matter

Author

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  • Anja Deelen

    (CPB Netherlands Bureau for Economic Policy Analysis)

  • Wouter Verbeek

Abstract

Although wage rigidity is an important topic, there is no full consensus in the literature on how to measure downward nominal and real wage rigidity. We conceptually and empirically compare the three commonly used methods for estimating wage rigidity. The simple approach as developed by the International Wage Flexibility Project (IWFP), the model based IWFP approach and the Maximum Likelihood approach. We estimate the three models on administrative panel data at the individual level for the Netherlands (2006-2012). One main nding is that assumptions regarding the 'notional' wage change distribution (which would prevail in the absence of wage rigidity) are an important determinant of the level of wage rigidity measured. We conclude that the model-based IWFP approach is the preferred model of the three, for it has the most sophisticated method to address measurement error and the assumptions regarding the wage change distribution that would prevail in absence of wage rigidity are most plausible. Furthermore we have researched the correlation between wage rigidity and worker and rm characteristics. Although the methods do not agree on the amount of rigidity, they agree for a large part on what variables have a positive or negative relation with downward nominal or real wage rigidity. We nd that the presence of wage rigidity is unevenly distributed among groups of workers: downward nominal and real wage rigidity in the Netherlands are positively related to a higher age, higher education, open-end contracts, full-time contracts and to working in a rm that experiences zero or positive employment growth. The consistency in the ndings regarding the determinants of wage rigidity indicate that all three methods measure the same phenomenon, which implies that estimates of determinants of wage rigidity can be compared over countries using any of the three methods. However, for measuring the fraction of workers covered by downward nominal or real wage rigidity, the choice of the method matters. Besides, we contribute to the literature by providing accurate, internationally comparable estimates of wage rigidity in the Netherlands. The overall picture is that the Netherlands has a less than average amount of downward nominal wage rigidity but and an above average level of downward real wage rigidity, compared internationally.

Suggested Citation

  • Anja Deelen & Wouter Verbeek, 2015. "Measuring Downward Nominal and Real Wage Rigidity - Why Methods Matter," CPB Discussion Paper 315, CPB Netherlands Bureau for Economic Policy Analysis.
    • Handle: RePEc:cpb:discus:315
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    References listed on IDEAS

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    Cited by:

    1. Jari Vainiomäki, 2020. "The development of wage dispersion and wage rigidity in Finland," Finnish Economic Papers, Finnish Economic Association, vol. 29(1), pages 1-32, Spring.
    2. Aedín Doris & Donal O’Neill & Olive Sweetman, 2015. "Wage flexibility and the great recession: the response of the Irish labour market," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-24, December.
    3. Dany Brouillette & Olena Kostyshyna & Natalia Kyui, 2018. "Downward nominal wage rigidity in Canada: Evidence from micro-level data," Canadian Journal of Economics, Canadian Economics Association, vol. 51(3), pages 968-1002, August.
    4. Nicole Bosch, 2019. "The Incidence of Pension Contributions," CPB Discussion Paper 388.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    5. Anja Deelen, 2019. "Flexible Wages or Flexible Workers?," CPB Discussion Paper 405.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    6. Nicole Bosch, 2019. "The Incidence of Pension Contributions," CPB Discussion Paper 388, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Bruce Fallick & Michael Lettau & William L. Wascher, 2016. "Downward Nominal Wage Rigidity in the United States during and after the Great Recession," Working Papers (Old Series) 1602, Federal Reserve Bank of Cleveland.
    8. Anja Deelen, 2021. "Flexible Wages or Flexible Workers? A Decomposition of Wage Bill Adjustment by Dutch Firms, 2006–2013," De Economist, Springer, vol. 169(2), pages 179-209, May.
    9. Vakulenko, E. & Gurvich, E., 2016. "Real Wage Flexibility in Russia: Comparative Analysis," Journal of the New Economic Association, New Economic Association, vol. 31(3), pages 67-92.
    10. Fallick, Bruce & Villar, Daniel & Wascher, William, 2022. "Downward nominal wage rigidity in the United States in times of economic distress and low inflation," Labour Economics, Elsevier, vol. 78(C).
    11. Nicole Bosch & Casper Ewijk & Maja Micevska Scharf & Sander Muns, 2022. "The Incidence of Pension Contributions: A Panel Based Analysis of the Impact of Pension Contributions on Labor Cost, Wages and Labor Supply," De Economist, Springer, vol. 170(1), pages 107-132, February.
    12. Anja Deelen, 2019. "Flexible Wages or Flexible Workers?," CPB Discussion Paper 405, CPB Netherlands Bureau for Economic Policy Analysis.

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    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining

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