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Downward wage rigidity and automatic wage indexation: Evidence from monthly micro wage data

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  • Patrick Lünnemann
  • Ladislav Wintr

Abstract

This paper assesses the degree of downward wage rigidity in Luxembourg using an administrative monthly data set on individual wages covering the entire economy over the period from January 2001 to January 2007. After limiting for measurement error, which would otherwise bias downwards the estimates of wage rigidity, we conclude that nearly all workers in Luxembourg are potentially subject to downward real wage rigidity. Our results are robust to different procedures to adjust for measurement error and methods for estimation of downward wage rigidity. We report relatively small differences in the frequency of nominal wage cuts across occupational groups and sectors. In addition, the observed rigidity does not seem to be driven predominantly by the absence of negative shocks. We show that the downward real wage rigidity is related to automatic wage indexation, while additional factors might be necessary to explain the high degree of downward nominal wage rigidity.

Suggested Citation

  • Patrick Lünnemann & Ladislav Wintr, 2010. "Downward wage rigidity and automatic wage indexation: Evidence from monthly micro wage data," BCL working papers 48, Central Bank of Luxembourg.
    • Handle: RePEc:bcl:bclwop:bclwp048
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    References listed on IDEAS

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    Cited by:

    1. Thomas Y. Mathä & Moritz Osterhuber & Ladislav Wintr, 2022. "Consumer price behaviour in Luxembourg: New evidence from micro price data for 2005-2017," BCL Bulletin Analyses, Central Bank of Luxembourg, vol. 2022, pages 75-84.
    2. Gábor Kátay, 2011. "Downward wage rigidity in Hungary," MNB Working Papers 2011/9, Magyar Nemzeti Bank (Central Bank of Hungary).
    3. Bruce Fallick & Daniel Villar Vallenas & William L. Wascher, 2016. "Downward Nominal Wage Rigidity in the United States During and After the Great Recession," Finance and Economics Discussion Series 2016-001r1, Board of Governors of the Federal Reserve System (U.S.), revised 15 May 2020.
    4. Thomas Y. Mathä & Cindy Veiga & Ladislav Wintr, 2016. "Employment, wages and prices: How did firms adjust during the economic and financial crisis? Evidence from a survey of Luxembourg firms," BCL working papers 104, Central Bank of Luxembourg.
    5. 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.
    6. Anja Deelen & Wouter Verbeek, 2015. "Measuring Downward Nominal and Real Wage Rigidity - Why Methods Matter," CPB Discussion Paper 315.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Cynthia L. Doniger, 2021. "What Can We Learn from Asynchronous Wage Changes?," Finance and Economics Discussion Series 2021-055r1, Board of Governors of the Federal Reserve System (U.S.), revised 31 Mar 2022.
    8. Jan Babecky & Kamil Dybczak, 2012. "Real Wage Flexibility in the European Union: New Evidence from the Labour Cost Data," Working Papers 2012/01, Czech National Bank.
    9. Patrick Lünnemann & Thomas Y. Mathä, 2011. "How do firms adjust in a crisis? Evidence from a survey among Luxembourg firms," BCL working papers 70, Central Bank of Luxembourg.

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    More about this item

    Keywords

    downward wage rigidity; wage indexation;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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