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Wage Flexibility and the Great Recession: The Response of the Irish Labour Market

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  • Doris, Aedin

    (National University of Ireland, Maynooth)

  • O'Neill, Donal

    (National University of Ireland, Maynooth)

  • Sweetman, Olive

    (National University of Ireland, Maynooth)

Abstract

There is considerable debate about the role of wage rigidity in explaining unemployment. Despite a large body of empirical work, no consensus has emerged on the extent of wage rigidity. Previous attempts to empirically examine wage rigidity have been hampered by small samples and measurement error. In this paper we examine nominal wage flexibility in Ireland both in the build up to, and during the Great Recession. The Irish case is particularly interesting because it has been one of the countries most affected by the crisis. Our main analysis is based on earnings data for the entire population of workers in Ireland taken from tax returns, which are free of reporting error. We find a substantial degree of downward wage flexibility in the pre-crisis period. We also observe a significant change in wage dynamics since the crisis began; the proportion of workers receiving wage cuts more than doubled and the proportion receiving wage freezes increased substantially. However, there is considerable heterogeneity in wage changes, with a significant proportion of workers continuing to receive pay rises at the same time as other were receiving pay cuts.

Suggested Citation

  • Doris, Aedin & O'Neill, Donal & Sweetman, Olive, 2013. "Wage Flexibility and the Great Recession: The Response of the Irish Labour Market," IZA Discussion Papers 7787, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp7787
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    Cited by:

    1. Logue, Caitriona & Colgan, Brian & Callan, Tim, 2016. "Low Pay, Minimum Wages and Household Incomes: Evidence for Ireland," Papers BP2017/3, Economic and Social Research Institute (ESRI).
    2. Olafsdottir, Katrin, 2020. "A deep recession came with deep wage cuts," Economics Letters, Elsevier, vol. 189(C).
    3. Niamh Holton & Donal O'Neill, 2017. "The Changing Nature of Irish Wage Inequality from Boom to Bust," The Economic and Social Review, Economic and Social Studies, vol. 48(1), pages 1-26.
    4. Chapman, Bruce & Doris, Aedín, 2019. "Modelling higher education financing reform for Ireland," Economics of Education Review, Elsevier, vol. 71(C), pages 109-119.
    5. Christine Arriola & Caitlyn Carrico & David Haugh & Nigel Pain & Elena Rusticelli & Donal Smith & Frank van Tongeren & Ben Westmore, 2018. "The Potential Macroeconomic and Sectoral Consequences of Brexit on Ireland," OECD Economics Department Working Papers 1508, OECD Publishing.
    6. Brian Nolan & Sarah Voitchovsky, 2016. "Job loss by wage level: lessons from the Great Recession in Ireland," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 5(1), pages 1-29, December.
    7. Michael W. L. Elsby & Gary Solon, 2019. "How Prevalent Is Downward Rigidity in Nominal Wages? International Evidence from Payroll Records and Pay Slips," Journal of Economic Perspectives, American Economic Association, vol. 33(3), pages 185-201, Summer.
    8. Michael W. L. Elsby & Donggyun Shin & Gary Solon, 2016. "Wage Adjustment in the Great Recession and Other Downturns: Evidence from the United States and Great Britain," Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages 249-291.
    9. Verdugo, Gregory, 2016. "Real wage cyclicality in the Eurozone before and during the Great Recession: Evidence from micro data," European Economic Review, Elsevier, vol. 82(C), pages 46-69.
    10. Boris Hirsch & Thomas Zwick, 2015. "How Selective Are Real Wage Cuts? A Micro-analysis Using Linked Employer–Employee Data," LABOUR, CEIS, vol. 29(4), pages 327-347, December.
    11. Conefrey, Thomas & Smith, Richard, 2014. "On the Slide? Salary Scales for New Graduates 2004-2012," Economic Letters 01/EL/14, Central Bank of Ireland.
    12. Park, Seonyoung & Shin, Donggyun, 2017. "The extent and nature of downward nominal wage flexibility: An analysis of longitudinal worker/establishment data from Korea," Labour Economics, Elsevier, vol. 48(C), pages 67-86.
    13. Charalampidis, Nikolaos, 2020. "On unemployment cycles in the Euro Area, 1999–2018," European Economic Review, Elsevier, vol. 121(C).
    14. Martins, Pedro S., 2016. "Can Overtime Premium Flexibility Promote Employment? Firm- and Worker-Level Evidence from a Labour Law Reform," IZA Discussion Papers 10205, Institute of Labor Economics (IZA).
    15. Yang, Daecheon & Song, Jeongseok, 2018. "Impact of wage rigidity on sovereign credit rating," Emerging Markets Review, Elsevier, vol. 34(C), pages 25-41.
    16. Michelle Barrett & Karina Doorley & Paul Redmond & Barra Roantree, 2022. "How Has the Gender Earnings Gap in Ireland Changed in Thirty Years?," Social Sciences, MDPI, vol. 11(8), pages 1-21, August.
    17. Boeri, Tito & Jimeno, Juan F., 2016. "Learning from the Great Divergence in unemployment in Europe during the crisis," Labour Economics, Elsevier, vol. 41(C), pages 32-46.
    18. Martins, Pedro S., 2017. "Economic effects of overtime premium flexibility: Firm- and worker-level evidence from a law reform," GLO Discussion Paper Series 102, Global Labor Organization (GLO).
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    More about this item

    Keywords

    wage flexibility; Great Recession;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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