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Downward Wage Rigidity and Labour Mobility

  • Cornelissen, Thomas

    ()

    (University of York)

  • Hübler, Olaf

    ()

    (Leibniz University of Hannover)

Using data from the German Socio-Economic Panel (GSOEP) effects of being individually affected by downward wage rigidity on layoffs, quits and intra-firm mobility are investigated. We measure the individual extent of wage rigidity within a structural empirical model that allows us to estimate the notional wage growth which is about 1.4 % on average over the whole period. Wage growth is swept up by 3.3 % through wage rigidity and 62 % of the work force are in the real rigid regime. We find negative effects of wage sweep-up on quits, layoffs and promotions. This is consistent with a core-periphery view of the labour force, where a core work force is at the same time protected from layoffs and from wage cuts, whereas a peripheral work force provides a buffer for adjustment and suffers from both flexible wages and more insecure jobs. Reducing promotions for high wage sweep-up workers seems to be strategy of employers to circumvent wage rigidity. This suggests that it is not a pay policy chosen by the employer, but that it is imposed upon the employer through bargaining power. However, decreased promotion opportunities do not seem to fully outweigh the benefit of generous wage growth.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1523.

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Length: 68 pages
Date of creation: Mar 2005
Date of revision:
Publication status: published in: Empirical Economics, 2008, 34(2), 205-230
Handle: RePEc:iza:izadps:dp1523
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