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Evidence of Nominal Wage Rigidity and Wage Setting from Icelandic Microdata

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  • Jósef Sigurdsson
  • Rannveig Sigurdardottir

Abstract

This paper presents new evidence about wage stickiness and the nature of wage setting. We use a unique micro dataset on monthly frequency, covering wages in the Icelandic private sector for the period from 1998-2010, and draw the following conclusions. First, the mean frequency of wage change is 10.8% per month. When weighted for heterogeneity across industries and occupations the result is almost identical; the frequency of change is 10.5% per month. Second, only 0.5% of monthly wage changes are decreases. Third, the mean duration of wage spells is 8.9 months. Onefifth of wage spells last longer than a year while other spells last for one year or shorter. Fourth, wage setting displays strong features of time-dependence: half of all wage changes are synchronised in January, but other adjustments are staggered through the year. Fifth, there is limited evidence of state-dependence: frequency of wage increases, size of increases, frequency of wage decreases and size of decreases do not correlate with inflation. However, both frequency and size of wage decreases have significant correlation with unemployment. Sixth, the hazard function for wages is mostly flat during the first months but has a large twelve-month spike. These facts align with a model of time-dependent wage contracts of fixed duration.

Suggested Citation

  • 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.
  • Handle: RePEc:ice:wpaper:wp55
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    Cited by:

    1. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2014. "A theory of wage adjustment under loss aversion," Kiel Working Papers 1977, Kiel Institute for the World Economy (IfW).
    2. Emi Nakamura & Jón Steinsson, 2013. "Price Rigidity: Microeconomic Evidence and Macroeconomic Implications," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 133-163, May.
    3. Camilo Morales-Jimenez, 2017. "The Cyclical Behavior of Unemployment and Wages under Information Frictions," 2017 Meeting Papers 366, Society for Economic Dynamics.
    4. Taylor, J.B., 2016. "The Staying Power of Staggered Wage and Price Setting Models in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2009-2042, Elsevier.
    5. Jósef Sigurdsson, 2011. "Unemployment Dynamics and Cyclical Fluctuations in the Icelandic Labour Market," Economics wp56, Department of Economics, Central bank of Iceland.
    6. Thorvardur Tjörvi Ólafsson & Ásgerdur Pétursdóttir & Karen Á. Vignisdóttir, 2011. "Price setting in turbulent times," Economics wp54, Department of Economics, Central bank of Iceland.
    7. Ascari, Guido & Phaneuf, Louis & Sims, Eric R., 2018. "On the welfare and cyclical implications of moderate trend inflation," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 56-71.
    8. Thorvardur Tjörvi Ólafsson & Ásgerdur Pétursdóttir & Karen Á. Vignisdóttir, "undated". "Price setting in turbulent times. Survey evidence from Icelandic firms," Economics Working Papers 2011-09, Department of Economics and Business Economics, Aarhus University.

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