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How Wages Change: Micro Evidence from the International Wage Flexibility Project

Author Info

Listed author(s):
  • Dickens, William T.

    ()

    (Brookings Institution)

  • Götte, Lorenz

    ()

    (University of Bonn)

  • Groshen, Erica L.

    ()

    (Federal Reserve Bank of New York)

  • Holden, Steinar

    ()

    (University of Oslo)

  • Messina, Julián

    ()

    (Inter-American Development Bank)

  • Schweitzer, Mark E.

    ()

    (Federal Reserve Bank of Cleveland)

  • Turunen, Jarkko

    ()

    (International Monetary Fund)

  • Ward-Warmedinger, Melanie E.

    ()

    (European Central Bank)

Abstract

How do the complex institutions involved in wage setting affect wage changes? The International Wage Flexibility Project provides new microeconomic evidence on how wages change for continuing workers. We analyze individuals’ earnings in 31 different data sets from sixteen countries, from which we obtain a total of 360 wage change distributions. We find a remarkable amount of variation in wage changes across workers. Wage changes have a notably non-normal distribution; they are tightly clustered around the median and also have many extreme values. Furthermore, nearly all countries show asymmetry in their wage distributions below the median. Indeed, we find evidence of both downward nominal and real wage rigidities. We also find that the extent of both these rigidities varies substantially across countries. Our results suggest that variations in the extent of union presence in wage bargaining play a role in explaining differing degrees of rigidities among countries.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2487.

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Length: 28 pages
Date of creation: Dec 2006
Publication status: published in: Journal of Economic Perspectives, 2007, 21 (2), 195-214
Handle: RePEc:iza:izadps:dp2487
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Keywords: downward nominal wage rigidity; wage change distributions; wage setting; downward real wage rigidity;

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Find related papers by JEL classification:
  • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
  • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
  • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining

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  1. Daniele Checchi & Claudio Lucifora, 2002. "Unions and labour market institutions in Europe," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 361-408, October.
  2. Lebow David E & Saks Raven E & Wilson Beth Anne, 2003. "Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-30, October.
  3. Joseph G. Altonji & Paul J. Devereux, 1999. "The Extent and Consequences of Downward Nominal Wage Rigidity," NBER Working Papers 7236, National Bureau of Economic Research, Inc.
  4. Camba-Méndez, Gonzalo & Garcí­a, Juan Angel & Rodriguez-Palenzuela, Diego, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 278, European Central Bank.
  5. Stephen Nickell & Glenda Quintini, 2003. "Nominal wage rigidity and the rate of inflation," Economic Journal, Royal Economic Society, vol. 113(490), pages 762-781, October.
  6. Holden, Steinar, 2004. "Wage formation under low inflation," Memorandum 09/2004, Oslo University, Department of Economics.
  7. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-715, September.
  8. Christoph Knoppik & Thomas Beissinger, 2009. "Downward nominal wage rigidity in Europe: an analysis of European micro data from the ECHP 1994–2001," Empirical Economics, Springer, vol. 36(2), pages 321-338, May.
  9. William T. Dickens & Lorenz Goette & Erica L. Groshen & Steinar Holden & Julian Messina & Mark E. Schweitzer & Jarkko Turunen & Melanie Ward, 2006. "The interaction of labor markets and inflation: analysis of micro data from the International Wage Flexibility Project," Proceedings, Federal Reserve Bank of San Francisco.
  10. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
  11. Smith, Jennifer C, 2000. "Nominal Wage Rigidity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 110(462), pages 176-195, March.
  12. Rodriguez-Palenzuela, Diego & Camba-Méndez, Gonzalo & García, Juan Angel, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 0278, European Central Bank.
  13. Stephen Nickell & Luca Nunziata, 2000. "Employment patterns in OECD countries," LSE Research Online Documents on Economics 20198, London School of Economics and Political Science, LSE Library.
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